1992 Tax Court Admission Examination

Instructions

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

This 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 (120 minutes) deals with procedural and evidentiary matters, including application of the Tax Court Rules of Practice and Procedure. The second section (120 minutes) deals with substantive Federal income, gift, estate, and generation-skipping transfer 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, resolve the ambiguity by stating an assumption in your answer, and then answer the question based upon your resolution of the ambiguity.

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. Unless directed to the contrary in a question, base your answers on the law as of the date of the examination.

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 pen 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.

(a) The IRS asserted an underpayment of Section 3402 withholding taxes against Taxpayer, a sole proprietor who employed 2 individuals. Taxpayer petitioned the Tax Court for a review of the asserted underpayment.

(b) Taxpayer, who is engaged in the business of preparing tax returns for other persons, received from the IRS a notice and demand for penalty pursuant to Section 6695(b) for failing to sign the tax returns of some of Taxpayer's customers. Taxpayer petitioned the Tax Court to challenge the penalty.

(c) Taxpayer filed a delinquent income tax return, but failed to pay the amount of tax shown as due. The IRS immediately assessed the tax shown as due on the delinquent return. The IRS thereafter sent a statutory notice of deficiency to Taxpayer for the year of the delinquent return; the deficiency notice proposed additional income tax due (beyond the amount reported on the delinquent return) and additions to tax under Sections 6651(a)(1) and 6654. The Taxpayer filed a petition with the Tax Court, and then filed motions to restrain the IRS from:

1. collecting the taxes assessed by the IRS based on the amount of tax shown as due on the delinquent return.

2. collecting the addition to tax under Section 6651(a)(1), to the extent it was based on the amount of tax shown as due on the delinquent return.

3. collecting the addition to tax under Section 6654 to the extent it was based on the amount of tax shown as due on the delinquent return.

How should the Tax Court rule on each of the three motions.

(d) A refund claim asserted by an individual taxpayer against the United States if the IRS has not issued a statutory notice of deficiency to the taxpayer with respect to the taxable period as to which the refund claim is asserted.

(e) The IRS issues a statutory notice of deficiency, but the taxpayer established an overpayment of tax for the period in issue. Does the Tax Court have jurisdiction to determine an overpayment and order that it be refunded?

(f) A taxpayer is properly before the Tax Court as a petitioner in response to an IRS statutory notice of deficiency. The IRS then issues a jeopardy assessment against the taxpayer as to a year properly before the Court pursuant to the taxpayer's petition. Does the Tax Court have jurisdiction as to the jeopardy assessment?

(g) Taxpayer's tax return for a prior year was under examination by the IRS based upon a reported distributive share of loss from a partnership. The IRS also was examining the partnership for the same taxable year. When the IRS requested the taxpayer to extend the period of limitations on assessment of tax for the year, the taxpayer declined. Before completing the examination of the partnership, the IRS issued a notice of deficiency to the taxpayer. The deficiency notice disallowed the entire partnership loss and properly calculated the deficiency that resulted from the loss disallowance by using Taxpayer's tax rates, credits, etc. Taxpayer timely files a proper petition with the Tax Court. Taxpayer then moves the Court to dismiss for lack of jurisdiction because of an invalid determination of taxpayer's purported deficiency. Does the Tax Court have jurisdiction?

Question P-2. (4 minute/s) State Yes or No.

(a) Taxpayer is the spouse of X. X had prepared a joint return for X and Taxpayer without the consent of Taxpayer, and X signed the return for X and for Taxpayer (without Taxpayer's authorization). The IRS issues a notice of deficiency to X and Taxpayer. Does the Tax Court have jurisdiction over Taxpayer as to the deficiency notice?

(b) The IRS issued a notice of deficiency to X Corporation. X Corporation had failed to pay its state franchise taxes with the result that the corporate charter had been forfeited and the corporation could not sue or defend in the courts of the state of organization. May X Corporation maintain a Tax Court proceeding in response to a deficiency notice?

(c) The IRS issued a notice of estate tax deficiency to an estate and the executor of the estate. In addition, the IRS issued a notice of deficiency to the executor of the estate asserting personal liability as fiduciary under Section 3467 of the Revised Statutes of the United States. The estate timely filed a petition as to the estate tax liability asserted in the notice of deficiency issued to the estate, and the executor signed the petition in his representative capacity, but the petition did not contest the personal liability of the executor asserted in the notice of deficiency issued to the executor as an individual. 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?

(d) Taxpayer filed a petition with the Tax Court. Before decision is entered, Taxpayer dies. Does the Tax Court have continuing jurisdiction with respect to the petition?

(e) Taxpayer filed a voluntary petition for bankruptcy in year 1. Taxpayer filed an income tax return for year 2, and the IRS then issued a statutory notice of deficiency for year 2. While the stay provision of 11 U.S.C. Section 362(a)(8) was in effect, the taxpayer filed a petition for redetermination with the Tax Court as to year 2. Does the Tax Court have jurisdiction to hear the case?

Question P-3. (5 minute/s) Briefly state the information that must be included in a petition filed by an individual taxpayer/petitioner with the Tax Court.

Question P-4. (2 minute/s) Must the filing fee accompany the petition submitted to the Court?

Question P-5. (3 minute/s) Taxpayer failed to file an income tax return or to pay tax. In a Tax Court petition, Taxpayer stated that he was unsettled by his recent divorce and unable to pay taxes. The petition otherwise contained no allegations of error by the IRS in the statutory deficiency notice. The IRS submits a motion to dismiss for failure to state a claim upon which relief can be granted. Discuss how the Tax Court should rule on the motion.

Question P-6. (3 minute/s) Discuss the circumstances under which a petition may be amended to conform to the evidence and issues tried in a Tax Court case.

Question P-7. (3 minute/s) State whether one or more than one petition must be filed in the following situations assuming that the taxpayer/s wish to invoke Tax Court jurisdiction:

(a) Taxpayer receives three separate statutory notices of deficiency for income taxes, one each for three different taxable years.

(b) Wife and Husband file their income tax returns as married filing jointly. Wife and Husband receive a statutory notice of deficiency for their joint 1991 income tax return.

(c) Wife and Husband file their income tax returns as married filing separate. Wife and Husband each receive a statutory notice of deficiency for their separate 1991 income tax returns.

Question P-8. (3 minute/s) Discuss whether Taxpayer has timely filed a petition with the Tax Court in the following situations:

(a) On the last day for timely filing his petition with the Tax Court, the petition was delivered to a DHL (a private, nongovernmental package delivery service) office and the Tax Court received the petition on the following day.

(b) The petition was electronically transmitted by telefacsimile to the Washington, D.C., office of Federal Express (a private, nongovernmental package delivery service) and a printout of the telefacsimile was delivered to the Court on the last day for timely filing. On the following day, the signed original of the petition was mailed to the Tax Court and received three days later.

Question P-9. (3 minute/s) Taxpayer received a statutory notice of deficiency alleging that the taxpayer failed to report certain items of gross income. Taxpayer timely filed a proper petition with the Tax Court asserting that the items in the deficiency notice were not the taxpayer's gross income. On the day that the taxpayer's case had been calendared for trial, the taxpayer moved the Court to amend the taxpayer's pleading to assert that the taxpayer had a net operating loss carryover to the year in issue. Will the Court grant the motion to amend?

Question P-10. (3 minute/s) Under what circumstances may the Tax Court limit the extent to which a party may obtain discovery?

Question P-11. (3 minute/s) Describe the time during which discovery may be undertaken in a Tax Court proceeding.

Question P-12. (3 minute/s) Define and explain the significance of the phrase "admission" under the Tax Court Rules related to pretrial discovery.

Question P-13. (3 minute/s) Taxpayer was the only shareholder of an S corporation. The corporation timely filed its income tax return for its taxable year ended November 30, 1985. Taxpayer timely filed a Federal income tax return for calendar year 1985 on or before April 15, 1986. The IRS sent a statutory notice of deficiency to Taxpayer on April 12, 1989, asserting a deficiency as to Taxpayer's calendar year 1985 individual income tax return based on the disallowance of a loss attributable to the S corporation for its taxable year ending November 30, 1985. Discuss whether the notice of deficiency is timely.

Question P-14. (3 minute/s) Taxpayer executed an IRS Form 872-A for a specific taxable year. The Form was an agreement between the taxpayer and the IRS to extend the period of limitations during which the IRS could assess income tax for the specified year. The Form provided that the agreement would terminate upon the issuance of a notice of deficiency or upon an IRS assessment of tax with respect to such year.

The IRS thereafter issued a statutory notice of deficiency to taxpayer, but the deficiency notice was invalid because it was not mailed to the taxpayer at the taxpayer's last known address. Taxpayer did not petition the Tax Court within 90 days of the notice and the IRS assessed the tax. Upon learning of the assessment, Taxpayer filed a petition in the Tax Court seeking to dismiss the proceeding because the deficiency notice was invalid, and the Tax Court granted the motion.

The IRS then issued another deficiency notice that was timely if the Form 872-A had not been terminated by the prior deficiency notice and assessment, but was not timely if the Form 872-A had been terminated by the prior deficiency notice and assessment. Taxpayer filed a timely petition with the Tax Court requesting dismissal based on lack of jurisdiction. Taxpayer argued that the deficiency notice was invalid because it was not timely in that the prior deficiency notice had terminated the Form 872-A and the period for assessment therefore had expired.

How will the Court rule?

Question P-15. (2 minute/s) Taxpayer executed an IRS Form 872-A for a specific taxable year. The Form was an agreement between the taxpayer and the IRS to extend the period of limitations during which the IRS could assess income tax for the specified year. The Form provided that the agreement would terminate upon the issuance of a notice of deficiency or upon an IRS assessment of tax with respect to such year.

The IRS took in excess of three years after termination of its audit of Taxpayer to issue a statutory notice of deficiency. Taxpayer filed a timely petition with the Tax Court and moved to dismiss on the basis that the deficiency notice was not valid because the Form 872-A had expired after a reasonable period of time that had been exceeded by the IRS in Taxpayer's case.

How will the Tax Court rule?

Question P-16. (2 minute/s) When does the statute of limitations (as to the timeliness of a statutory notice of deficiency) begin to run with respect to a fraudulent income tax return if the taxpayer thereafter files an amended, nonfraudulent return for the period?

Question P-17. (3 minute/s) Taxpayer reported gross income of $50,000 and claimed various deductions on Taxpayer's federal income tax return for year 1. The IRS contends that the proper amount of gross income is $65,000.

Discuss the applicable period of limitation on assessment of a deficiency if Taxpayer inadvertently failed to report $15,000 of gross income (so that the correct gross income was $65,000, rather than the $50,000 that was reported).

Question P-18. (2 minute/s) Taxpayer is granted an extension with regard to the filing date of Taxpayer's individual income tax return. Taxpayer then files the income tax return before the extended due date of the return. Discuss the period of time within which the IRS must issue a statutory notice of deficiency as to the return filed pursuant to the extension.

Question P-19. (2 minute/s) Taxpayer is convicted of a willful attempt to evade or defeat tax under Section 7201. Discuss whether taxpayer is collaterally estopped from challenging the issue of the presence of fraud as to the same taxable year in a subsequently filed proceeding in the Tax Court in which the IRS is asserting the Section 6663 fraud penalty.

Question P-20. (2 minute/s) Briefly discuss whether a Tax Court petitioner has a right to have his or her case heard by a Presidentially-appointed Tax Court Judge rather than by a Special Trial Judge.

Question P-21. (4 minute/s) Will the Tax Court automatically issue a protective order to prevent the use of information gained pursuant to an administrative summons issued to a taxpayer after the taxpayer has filed a petition with the Tax Court? Briefly explain why or why not.

Question P-22. (3 minute/s) Under what circumstances will the Court issue a protective order regarding nondisclosure of information that constitutes part of the record of the case?

Question P-23. (3 minute/s)

(a) Define burden of proof.

(b) Discuss which party has the burden of proof on which issues in a Tax Court trial.

Question P-24. (2 minute/s) Identify the rules of evidence that apply in the Tax Court.

Question P-25. (2 minute/s) What is the permitted scope of cross examination of a witness in the Tax Court?

Question P-26. (2 minute/s) Is testimony about the reputation of a witness admissible? Briefly explain why.

Question P-27. (3 minute/s) Define "hearsay" evidence and give an example of a statement that is hearsay.

Question P-28. (3 minute/s) Define the "records of regularly conducted activity" exception to the hearsay rule.

Question P-29. (2 minute/s) Explain how a document is authenticated in a Tax Court proceeding.

Question P-30. (2 minute/s) Under what circumstances is the duplicate of a document not admissible into evidence?

Question P-31. (2 minute/s) Explain the meaning of the "parol evidence rule."

Question P-32. (2 minute/s) Discuss whether additions to tax for fraud may be imposed by the Tax Court if the petitioner does not appear for trial and a default is granted to the IRS.

Question P-33. (2 minute/s) Discuss whether the Tax Court will refuse to admit evidence secured in violation of the petitioner's Constitutional rights.

Question P-34. (4 minute/s) Describe briefly the essential elements of the small tax case procedure in the Tax Court.

Question P-35. (2 minute/s) The X Partnership is limited partnership. The tax matters partner, P, disappeared in 1985 when a warrant was issued for his arrest. In February 1986, the X Partnership was placed in receivership and S was appointed receiver pendente lite by the U.S. District Court. The District Court order authorized S to act as "tax matters partner ... in all proceedings before the Internal Revenue Service or any other tax or administrative agency and to take such actions as the receiver may deem advisable." S was not a partner in the X Partnership. Creditors of the X Partnership instituted involuntary bankruptcy proceedings against the partnership in May 1986. In September 1987, the receivership was terminated and the proceedings were referred to the bankruptcy court by the U.S. District Court. IRS notices of final partnership administrative adjustment were issued to the X Partnership on March 10, 1987. The FPAA notice was sent to P as tax matters partner and to S as tax matters partner. A timely petition was filed with respect to the X Partnership by S, and no other petitions were filed in response to the FPAA. Discuss whether an IRS motion to dismiss for lack of jurisdiction should be granted.

Question P-36. (2 minute/s) Taxpayer was a partner in a partnership that, for the taxable year in issue, was subject to the provisions of Subchapter C of chapter 63 of subtitle A of the Internal Revenue Code. The IRS issued a proper and timely notice of Final Partnership Administrative Adjustment to the partnership, and the tax matters partner filed a petition with the Tax Court regarding the notice. One week after issuing the notice of Final Partnership Administrative Adjustment, the IRS issued a proper and timely notice of deficiency to Taxpayer as to certain nonpartnership items for one taxable year. Taxpayer filed a timely petition with the Tax Court and alleged an overpayment of tax for the year in issue due to certain partnership items.

Discuss whether the Tax Court has jurisdiction to determine an overpayment attributable to the partnership items in the proceeding initiated by the deficiency notice issued as to the nonpartnership items.

Question P-37. (2 minute/s) The IRS issued a notice of Final S Corporation Administrative Adjustment in which the IRS reallocated income of the S corporation from the shareholder of record to that shareholder's parent, who was not a shareholder of record of the S corporation. Briefly explain whether the Tax Court has jurisdiction under the Subchapter S corporation audit and litigation procedures to allocate the S corporation income to a person who is not a shareholder of record.

Question P-38. (2 minute/s) Discuss who may appear in Tax Court proceedings for the petitioner.

Question P-39. (5 minute/s) Briefly discuss the circumstances under which costs (including attorney fees) may be awarded to a taxpayer in a proceeding before the Tax Court.

Question P-40. (2 minute/s) At what point in a Tax Court case must a request for an award of administrative costs be submitted?

Question P-41. (2 minute/s) Taxpayer, a person who has been admitted to appear before the Tax Court, represents herself in a Tax Court proceeding and prevails. Discuss whether Taxpayer can recover fees for her services pursuant to Section 7430.

Question P-42. (2 minute/s) Counsel had undertaken representation of Taxpayer and had made an entry of appearance before the Tax Court. At the calendar call for the trial session for Taxpayer's case, Counsel submitted a motion to withdraw from the case. Counsel stated that Counsel had made numerous telephone calls (leaving messages on Taxpayer's answering machine) and had written Taxpayer on numerous occasions regarding the upcoming trial and the need for Counsel to meet with Taxpayer to prepare for trial. Taxpayer had not contacted Counsel even though Counsel had reason to believe that Taxpayer still resided at the residence to which the telephone calls and letters had been directed. How will the Court rule on the motion to withdraw and why?

Question P-43. (2 minute/s) Taxpayer had filed an income tax return for the year in issue showing tax due, but Taxpayer did not pay the tax shown as due. Taxpayer then received a letter from the IRS relating to a final notice of intention to levy the taxes shown as due for the year. Upon receipt of the letter, Taxpayer retained Counsel for assistance. Counsel then prepared, executed, and submitted a petition to the Tax Court seeking relief from the levy. A statutory notice of deficiency had not been issued as to the year in issue. When the IRS answer to the petition asserted lack of jurisdiction, Counsel refused to concede the lack of jurisdiction. The Tax Court granted the motion to dismiss based on lack of jurisdiction.

Discuss briefly whether Counsel is subject to any sanctions under these circumstances.

Question P-44. (2 minute/s) In a Tax Court Rule 155 calculation, may the determination of the correct amount of the deficiency, liability, or overpayment be adjusted for the following items that were not reported on the tax and which were not raised before the Tax Court at trial?: (a) A capital loss carryover to the year before the Court. (b) Adjustments, specifically agreed to by both the IRS and the taxpayer, to the Year before the Court.

Question P-45. (2 minute/s) Discuss whether the Tax Court may order the parties to a case to use arbitration as to the issue of the value of certain property.

Question S-2. (3 minute/s) Taxpayer borrowed money from a bank and pursuant to the terms of the loan made interest only payments for three years. The bank had violated Truth-in-Lending laws, and to settle its violations, Taxpayer was permitted to satisfy the debt (in part) by crediting all the previously-paid interest against the principal amount of the loan. The interest previously had been deducted for federal income tax purposes. Describe the federal income tax consequences of the crediting of the interest against the principal amount of the loan.

Question S-3. (3 minute/s) Taxpayer was engaged in the jewelry manufacturing and selling business. Taxpayer maintained a large collection of stones for use in its manufacturing of jewelry. It was taxpayer's practice to treat as "inactive" and deduct for federal income tax purposes certain amounts of its stone inventory. The "inactive" amount was calculated as the inventory in excess of three times the amount of stones used in the current year in each stone style. Taxpayer did not scrap the stones and many of them were commingled with indistinguishable stones that taxpayer sold at normal prices and used in the normal way. Taxpayer listed all stones in its price catalogue and sold stones from styles that had "inactive" stones. In addition, the "inactive" stones were not physically segregated from the active stones of the style. Discuss whether Taxpayer's deduction of the "inactive" stones is proper.

Question S-4. (6 minute/s) State the amount (without any further explanation), if any, of the following items that constitute gross income to Taxpayer:

(a) $10,000 profit from illegal drug dealings.

(b) $250 value of a watch won at the grand opening of a new superstore.

(c) $700 of interest received on U.S. Treasury Bill.

(d) $3,000 of interest received on a State of Washington bond used to finance the construction of new public schools.

(e) $8,000 extorted from business acquaintance.

(f) $20,000 principal of loan repaid to Taxpayer at maturity of loan and $1,500 of interest.

(g) $400 cost to Taxpayer's employer of $25,000 of life insurance on Taxpayer's life, which is provided under a group term policy of the employer.

(h) $7,000 as a partial payment of the proceeds of a life insurance policy in the face amount of $100,000 on Taxpayer's spouse who died during the year. Taxpayer elected pursuant to the terms of the policy to receive a $7,000 payment in each year for life. Taxpayer's life expectancy is 20 years when the payments commence.

(i) $5,000 cash found on sidewalk in front of Taxpayer's house that Taxpayer spent on a flyfishing trip to British Columbia.

(j) $250,000 cash prize for winning the Nobel Prize in physics; Taxpayer decided not to accept the award money and directed it to a university to support scientific research.

(k) $12,000 as a gift from Taxpayer's father.

(l) $13,000 received from a testamentary trust created according to the terms of the will of Taxpayer's spouse who died during the year. The spouse's will provided that all income of the trust was to be distributed to Taxpayer for Taxpayer's life and that, after the death of Taxpayer, the trust was to terminate by distribution to the spouse's then living lineal descendants.

Question S-5. (5 minute/s) Taxpayer lived with Taxpayer's family in Denver, Colorado. During the current taxable year, Taxpayer was employed by a corporation engaged in the business of construction of buildings. Taxpayer was employed as a construction engineer and traveled extensively. For many years, Taxpayer had been based at the Denver office. On January 1 of the current year, Taxpayer was assigned to supervise activities at various construction sites away from Denver. The supervisory assignment was for a two-year period. Because most of Taxpayer's working time was in Phoenix, Arizona, Taxpayer rented an apartment in Phoenix and generally ate and slept there from Sunday evening to Friday afternoon. Taxpayer usually would travel to Denver on Friday evening to spend the weekend with Taxpayer's family and then return to Phoenix on Sunday evening. During the work week, Taxpayer traveled to many different construction sites maintained by Taxpayer's employer.

Discuss the deductibility by Taxpayer of the following costs incurred by Taxpayer:

(a) Costs attributable to the trips from Denver to Phoenix on Sunday evenings and the return trips from Phoenix to Denver on Friday evenings;

(b) Rental of the apartment in Phoenix;

(c) Costs attributable to the trips from the Phoenix apartment to the first temporary job site visited in the morning and the trips from the last temporary job site at the end of a workday back to the Phoenix apartment;

(d) Costs attributable to Taxpayer's travel between job sites during the workday.

Question S-6. (4 minute/s) Discuss the rules applicable in determining whether expenses associated with a "home office" are deductible.

Question S-7. (4 minute/s) Discuss briefly the essential elements of the "hobby loss" rules.

Question S-8. (2 minute/s) Taxpayer incurs expense for professional tax return preparation. Part of the tax return preparation cost is attributable to Taxpayer's business as a sole proprietor as reported on Schedule C of the IRS Form 1040. In addition, Taxpayer incurs professional representation costs with regard to an IRS audit. The audit involves two issues: (1) Taxpayer's entitlement to a dependency exemption for Taxpayer's parent and (2) Taxpayer's business expenses reported on Schedule C.

(a) Discuss whether any of the tax return preparation expenses are deductible for federal income tax purposes and, if so, whether they are deductible in calculating adjusted gross income.

(b) Discuss whether any of the professional representation expenses are deductible for federal income tax purposes and, if so, whether they are deductible in calculating adjusted gross income.

Question S-9. (3 minute/s) Taxpayer, a corporation, is engaged in the banking business. Taxpayer acquires all the assets and liabilities of another bank. In determining the purchase price for the assets, Taxpayer considered the existence and value of the target bank's "core deposits" intangible. A core deposit intangible represents savings that may be realized by use of funding bank assets with the stable ("core") deposits rather than another funding source. Taxpayer's accountants determined the amount of the core deposit intangible according to generally accepted accounting principles. After allocating the purchase price among specific assets including the core deposit intangible, Taxpayer allocated the residual amount to goodwill. Discuss whether the portion of the purchase price attributable to the "core deposit intangible" may be amortized under Section 167.

Question S-10. (2 minute/s) Taxpayer, a corporation the stock of which was publicly traded, was approached by White Knight, Inc., who made a "friendly" offer to acquire all of the outstanding stock of Taxpayer (so that Taxpayer would become a wholly-owned subsidiary of White Knight). The Taxpayer board of directors was not hostile to the takeover, but the board decided to retain an investment banking firm and legal counsel to evaluate the offer. The takeover was effectuated, but only after extensive negotiations that raised the price per share of the acquisition relative to the original offer by White Knight. Discuss whether the investment banking and legal fees incurred by Taxpayer properly are deductible when incurred.

Question S-11. (3 minute/s) A and B are married, and A is the sole owner of real property in which A's adjusted basis is $20,000. A sells the real property to B for its fair market value, $50,000. B pays A in cash. Later in the year, B sells the real property to an unrelated third party for $55,000. Briefly discuss and quantify the consequences of these transactions.

Question S-12. (5 minute/s) Husband and Wife are divorced in 1989. Husband and Wife enter into a marital property and support agreement that is approved by the divorce court and adopted as its order. The agreement requires Wife to make alimony support payments in cash to Husband as follows:

	Year	Amount of Alimony
	1990 	$60,000
	1991	 30,000
	1992	 40,000

Question S-13. (4 minute/s) As to a joint return, describe and discuss the liability of each spouse.

Question S-14. (8 minute/s) A and B (unrelated individuals) exchange properties on December 1, 1992. A transfers to B Blackacre, unimproved real property held by A as an investment, with an adjusted basis to A of $120,000 and a gross fair market value of $190,000 on December 1, 1992. The real property is encumbered by a mortgage debt of $40,000, leaving a net equity in the property of $150,000. B assumes the mortgage debt on Blackacre, which B holds for sale to customers in B's real estate business.

B transfers to A the following:

1. Whiteacre, unimproved real property held for sale to customers in B's real estate business, with an adjusted basis to B of $50,000 and a gross fair market value of $195,000 on December 1, 1992. The real property is encumbered by a mortgage debt of $50,000, leaving a net equity in the property of $145,000. A assumes the mortgage debt on Whiteacre, which A holds as investment property.

2. Cash of $5,000.

Discuss and quantify all the federal income tax consequences to each of A and B. First analyze all the consequences to A and then analyze all the consequences to B.

Question S-15. (6 minute/s) In 1990, Taxpayer acquired unimproved real property with a fair market value of $200,000. To do so, Taxpayer paid $125,000 cash and executed a $75,000 first mortgage indebtedness (for which Taxpayer was personally liable) to the seller. In 1991, Taxpayer borrowed $40,000 from a bank, in return for which Taxpayer executed a nonrecourse note (no personal liability to Taxpayer) and a second mortgage on the property. The $40,000 proceeds of the loan were used to purchase an automobile. In 1992, Taxpayer received an offer to buy the property, which Taxpayer accepted. Buyer paid $140,000 cash, assumed the first mortgage debt of $50,000 (it had been paid down from $75,000 to $50,000), and took subject to the second mortgage debt of $40,000.

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

(b) Describe the federal income tax consequences of the 1991 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 1992.

Question S-16. (4 minute/s) In 1988, Taxpayer received 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 $50,000. The fair market value of the property at the time of the gift transfer to Taxpayer was $30,000. No gift tax was paid on the transfer.

(a) If the property is sold by Taxpayer in 1992 for $75,000, what is Taxpayer's adjusted basis for determining gain or loss?

(b) If the property is sold by Taxpayer in 1992 for $25,000, what is Taxpayer's adjusted basis for determining gain or loss?

(c) What gain or loss is realized if the property is sold by Taxpayer in 1992 for $40,000?

(d) If Donor had paid a gift tax of $1,000 on the 1988 transfer, what effect would it have on Taxpayer's adjusted basis in part (a)?

Question S-17. (2 minute/s) X's cost to acquire unimproved real property was $7,000. On December 4, 1992, the estate of X, who died on January 1, 1992, distributed the property to Taxpayer as the beneficiary of X's will. On December 4, 1992, the fair market value of the property was $15,000, and on January 1, 1992, the fair market value of the property was $13,000. Ignore Sections 2032 and 2032A for purposes of this Question. State Taxpayer's adjusted basis in the property.

Question S-18. (5 minute/s) Taxpayer (not a dealer in stock or securities) purchased 200 shares of ZXY, Inc., common stock on January 1, 1989, for $100 per share, or a total acquisition cost of $20,000.

On June 15, 1992, Taxpayer purchases 150 shares of ZXY, Inc., common stock (same class as the 1989 purchase) for $75 per share, or a total of $11,250. On July 12, 1992, Taxpayer sells the 200 shares of ZXY, Inc., common stock that had been purchased in 1989; the shares are sold for $85 per share, or a total of $17,000. On December 12, 1992, Taxpayer sells the 150 shares of ZXY, Inc., that were purchased on June 15, 1992; the shares are sold for $90 per share, or a total of $13,500.

Describe and quantify the tax consequences to Taxpayer of the foregoing events, assuming that the shares of stock are investment property to Taxpayer.

Question S-19. (8 minute/s) X formed Xerod Corporation on January 1, 1980. On January 1, 1981, Y acquired 30% of the stock of Xerod, and since that time, X has owned 70% and Y 30% of the Xerod stock. Xerod has been a qualifying S corporation since its inception in 1980. During 1981, Xerod had current earnings and profits of $5,000. During 1982, Xerod had current earnings and profits of $15,000.

As of January 1, 1983, X's adjusted basis in the shares of Xerod was $60,000, and Y's adjusted basis in the shares of Xerod was $50,000. Xerod realized no items subject to Section 1366(a)(1)(A) and the following amounts of net nonseparately computed income (as defined in Section 1366(a)(1)(B)):

	YEAR	AMOUNT
	1983	$5,000
	1984	10,000
	1985	12,000
	1986	18,000
	1987	25,000
	1988	30,000

Question S-20. (3 minute/s) The 123 Corporation was a C corporation until 1992. As of January 1, 1992, the 123 Corporation properly elected to be treated as an S corporation. During the years that 123 was a C corporation, it had generated net operating losses that had not been consumed prior to January 1, 1992. Explain what happens to the net operating loss when 123 Corporation becomes an S corporation.

Question S-21. (3 minute/s) Taxpayer became a 20% partner of the Royal Mile Partnership, a general partnership. Taxpayer received the partnership interest in consideration of contributing real property to the partnership. The real property had a gross fair market value of $150,000, but it was encumbered by a mortgage debt of $100,000 owed by Taxpayer to a bank. Taxpayer's adjusted basis in the real property at the time of the contribution to the partnership was $125,000. The partnership assumed the debt encumbering the property. What is Taxpayer's basis in the partnership interest?

Question S-22. (10 minute/s) The Hollyrood Partnership makes a distribution to Taxpayer in liquidation of Taxpayer's entire one-third interest in the partnership. At the time of the distribution, the balance sheet of the partnership, which uses the accrual method of accounting, is as follows:

			Assets

					Adjusted	Market
					basis per	value
					books

Cash ................................... $10,000	$10,000
Accounts receivable ....................  15,000	 15,000
Inventory ..............................  20,000	 30,000
Depreciable property ...................  15,000	 20,000
Land ...................................  20,000	 20,000
					  _____________________
Total	................................  80,000	 95,000

		Liabilities and Capital

					Per books	Value

Current liabilities .................... $23,000	$23,000
Mortgage payable .......................  12,000	 12,000
Capital:
  A ....................................  15,000	 20,000
  B ....................................  15,000	 20,000
  C ....................................  15,000	 20,000
					  _____________________
Total	................................  80,000	 95,000

Question S-23. (3 minute/s) Discuss briefly the major requirements of the statutory provision that permits a transferee to refuse property for purposes of the federal estate and gift taxes.

Question S-24. (4 minute/s) X and Y were married. X's will provided that a trust was to be established for the benefit of Y upon X's death with Y surviving. The relevant portions of X's will provide that Y is to receive, for Y's life, all of the income of the trust, which income is to be distributed no less frequently than semi-annually, except to the extent that the trustee exercises the discretion to accumulate income if the income otherwise payable exceeds the amount the trustee deems necessary for Y's needs, best interests, and welfare. During Y's life, the trust may make distributions only to Y. The will recites X's intention that the bequest to Y qualify for the estate tax marital deduction. Upon the death of Y, X's will provides that the trust property goes to C, the child of X and Y. X dies. Discuss whether X's estate qualifies for the marital deduction as to Y's interest in trust created under X's will.

Question S-25. (3 minute/s) X died in 1991 and X's estate filed an estate tax return that utilized Section 2032A to value certain property owned by X at the time of death. The estate tax return did not have attached to it the agreement required by Section 2032A(a)(l)(B) and (d)(2) (no such agreement had been entered into by the parties who would have to enter into such an agreement). Explain whether the estate qualifies for Section 2032A valuation.

Question S-26. (2 minute/s) X made various taxable gifts (and paid gift tax) in prior years as to which the statute of limitations has expired so that the IRS may not now assess additional gift tax as to those transfers. X dies. Discuss whether the IRS may revalue the prior-year gifts for purposes of determining the amount of adjusted taxable gifts used in calculating the estate tax liability of X's estate.

Question S-27. (3 minute/s) X creates an irrevocable trust over which X has no power or authority and as to which he has no beneficial interest. The trust incurs investment advice fees for services rendered to the trust in managing the investment of the trust principal. Discuss whether the trust may deduct such expenses and describe any limitation that may apply to the deduction of such expenses.

Question S-28. (3 minute/s) A died owning an IRA. As of A's death, the IRA held assets that had appreciated since they were acquired by the IRA. Some of the contributions by A to the IRA had been nondeductible contributions. The designated beneficiary of the IRA was A's child, B. The entire balance in the IRA, including appreciation and income accruing before and after A's death, was distributed to B in a lump sum shortly after A's death. Briefly discuss the federal income tax consequences associated with the distribution of the lump sum to B.

Question S-29. (3 minute/s) Discuss whether Taxpayer is subject to the additions to tax for substantial understatement of tax and for late filing as to a year for which the taxpayer files the required return several years late (after being contacted by the IRS regarding the not-then-filed return).

Question S-30. (3 minute/s) Taxpayer filed an income tax return that failed to report Taxpayer's self-employment tax due. Discuss whether the self-employment tax should be included in the determination of whether Taxpayer is subject to the addition to tax for substantial understatement of tax.