1994 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 a reasonable assumption in your answer, and then answer the Question based upon your resolution of the ambiguity.

Unless otherwise indicated, assume all taxpayers use the cash method of accounting and are calendar year taxpayers. 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 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.

Question P-2. (1 minute/s) Taxpayer litigated a case in the Tax Court, and then appealed the decision adverse to Taxpayer. On appeal, the decision was reversed in part and remanded to the Tax Court for further proceedings. During these further proceedings in the Tax Court, Taxpayer moves to dismiss for lack of jurisdiction because the deficiency notice was not timely. Should the Tax Court grant the motion to dismiss? State YES or NO.

Question P-3. (1 minute/s) Taxpayer has asserted a refund claim against the United States, but the IRS has not issued a statutory notice of deficiency to Taxpayer with respect to the taxable period as to which the refund claim is asserted. Determine whether the Tax Court has subject matter jurisdiction to hear the case. State YES or NO.

Question P-4. (1.5 minute/s) The IRS issues a statutory notice of deficiency, Taxpayer files a proper petition with the Tax Court, and Taxpayer proves an overpayment of tax for the period in issue. Does the Tax Court have jurisdiction to determine an overpayment and to order that it be refunded? State YES or NO.

Question P-5. (1.5 minute/s) The IRS asserted a deficiency in estate tax against the taxpayer estate based on alleged undervaluation of shares of stock. The estate filed a petition to the Tax Court seeking a determination of the deficiency in estate tax. In the petition, the estate asserted the defense of equitable recoupment based on the fact that the beneficiary of the estate had overpaid income tax with respect to property distributed by the estate. The statute of limitations already had expired so as to bar the beneficiary's refund claim against the IRS. Does the Tax Court have jurisdiction to consider the asserted defense in determining the estate's estate tax deficiency? State YES or NO.

Question P-6. (1.5 minute/s) The IRS sent Taxpayer two deficiency notices under section 6212; one deficiency notice related to withholding taxes as to wages paid by Taxpayer, and the other deficiency notice related to income taxes for three taxable years. Taxpayer timely files a petition with the Tax Court that refers only to the first deficiency notice (relating to withholding taxes) and the amounts of the withholding tax deficiency amounts, but refers to the first deficiency notice amounts as "income" taxes. After expiration of the 90 day period for filing a petition with respect to the second deficiency notice, Taxpayer moves to amend the petition filed as to the first deficiency notice so as to contest the deficiency amounts of income tax asserted in the second deficiency notice. Does the Tax Court have jurisdiction to consider the income tax deficiencies asserted in the second deficiency notice? State YES or NO.

Question P-7. (1.5 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 Taxpayer, the tax matters partner, filed a petition with the Tax Court regarding the notice. During the Tax Court proceeding pursuant to the Final Partnership Administrative Adjustment, does the Tax Court have jurisdiction to determine Taxpayer's section 465 amount at risk with respect to the partnership? State YES or NO.

Question P-8. (1.5 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. In response to the Final Partnership Administrative Adjustment, X, a person other than the "tax matters partner," filed a petition with the Tax Court even though the petition was filed during the period of time that the petition could be filed only by the tax matters partner. The conduct of the partners (including Taxpayer) before and after filing of the petition indicated acceptance of the representation of the partnership by X in business matters and in matters relating to the IRS. After the period of time elapsed for assessment of the taxes in controversy, Taxpayer moved to dismiss the petition for lack of jurisdiction because the petition was not filed by the tax matters partner. Does the Tax Court have jurisdiction over the issues raised in the petition? State YES or NO.

Question P-9. (1.5 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 Taxpayer received a copy of the Final Partnership Administrative Adjustment. A petition with respect to the Final Partnership Administrative Adjustment was not filed with the Tax Court, and the IRS assessed deficiencies in Taxpayer's income tax attributable to Taxpayer's interest in the partnership. Thereafter, the IRS issued a statutory notice of deficiency to Taxpayer for penalties with respect to the assessed deficiency in income tax. Taxpayer timely files a petition with the Tax Court challenging the assessed income taxes and the asserted penalties. Does the Tax Court have jurisdiction with respect to the assessed income taxes? State YES or NO.

Question P-10. (3 minute/s) Taxpayer is a United States citizen presently residing in the United States. On April 11, 1994, the IRS mailed a notice of deficiency (bearing the date of April 11, 1994) to Taxpayer regarding Taxpayer's 1992 income liability. Taxpayer received the notice on April 15, 1994. What is the last day on which Taxpayer timely can file a petition with the Tax Court? The following calendar may be of use to you:

		S	M	T	W	Th	F	S

	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

Question P-12. (5 minute/s) Describe the pleading and the contents of the pleading that must be filed by or on behalf of a taxpayer to initiate a Tax Court proceeding. Also explain what must accompany the pleading.

Question P-13. (5 minute/s) Discuss the significance and meaning of the phrase "last known address" with respect to a statutory deficiency notice.

Question P-14. (2 minute/s) In terms of Tax Court practice, when does the joinder of issue occur, and explain its significance.

Question P-15. (2 minute/s) Discuss what a party must undertake before commencing formal pretrial discovery in the Tax Court.

Question P-16. (3 minute/s) Discuss:

(a) the responsibility, if any, of a party to a Tax Court case regarding stipulations and

(b) the effect of a stipulation on a party as to matters in issue.

Question P-17. (5 minute/s) Discuss the sanctions available to the Tax Court in the event of noncompliance with pretrial discovery procedures.

Question P-18. (3 minute/s) State the statute of limitations rule that applies to the following income tax returns (that are properly, completely, timely, and nonfraudulently filed except as indicated below):

(a) An income tax return with respect to a deduction claimed on the face of the return.

(b) An income tax return with respect to a gross income item not included in the return and with respect to a deduction claimed on the face of the return.

(c) A fraudulent income tax return for year 1 is filed in year 2, and in year 3 a nonfraudulent and correct return for year 1 is filed.

Question P-19. (3 minute/s) Taxpayer timely filed a Federal income tax return for calendar year 1990 on or before April 15, 1991, and the return reflected a loss attributable to an S corporation of which Taxpayer was the only shareholder. On or before August 15, 1990, the corporation timely filed its income tax return for its taxable year ended June 30, 1990. The IRS sent a statutory notice of deficiency to Taxpayer on April 12, 1994, asserting a deficiency as to Taxpayer's calendar year 1990 individual income tax return based on the disallowance of a loss attributable to the S corporation for its taxable year ending June 30, 1990. Discuss whether the notice of deficiency is timely.

Question P-20. (4 minute/s) In 1990, Taxpayer was a partner of a partnership that eventually was the subject of an IRS unified partnership audit that resulted in a notice of Final Partnership Administrative Adjustment (FPAA) on June 20, 1993. The partnership never filed a return for 1990. In response to the FPAA, a proper partner did file a petition with the Tax Court, and the proceeding ended with a final decision in favor of the IRS in 1993. Taxpayer was a Notice Partner, but Taxpayer did not receive the FPAA until May 5, 1994, when the IRS first mailed Taxpayer a copy of the FPAA and notice of commencement of the unified partnership proceeding. At that time, the IRS invited Taxpayer to elect to have the Court's decision apply to Taxpayer pursuant to section 6223(e)(2). Taxpayer did not respond to the offer. The IRS issued a notice of deficiency to Taxpayer on June 7, 1994, in which the IRS disallowed Taxpayer's claimed partnership deduction. Taxpayer timely files a petition with the Tax Court asserting that the deficiency notice is not timely and is invalid. Explain whether the statute of limitations renders the notice issued on June 7, 1994, invalid.

Question P-21. (2 minute/s) Explain the circumstances under which the Tax Court will grant summary judgment.

Question P-22. (2 minute/s) Taxpayer was found to have a large sum of cash in Taxpayer's possession upon entering the United States. The IRS issued a termination assessment for the part of the year up to the date of discovery of the cash. Thereafter, the IRS issued a deficiency notice for the entire taxable year that included the date of discovery of the cash, and Taxpayer timely filed a petition with the Tax Court. The government initiated a suit in U.S. district court to reduce the termination assessment to judgment and received a summary judgment in its favor. The IRS then moved for summary judgment in the Tax Court proceeding on the basis of res judicata. Explain whether the doctrine of res judicata would apply to the Tax Court proceeding.

Question P-23. (1 minute/s) Briefly describe the meaning under the Tax Court Rules of the phrase "consolidated trial."

Question P-24. (1 minute/s) Briefly describe the circumstances under which a husband and wife may file a joint petition to the Tax Court.

Question P-25. (4 minute/s) Taxpayer was charged with, plead guilty to, and was convicted of a willful attempt to evade or defeat tax under section 7201. After the conviction, the IRS issued a deficiency notice asserting the section 6663 fraud penalty for the same taxable year. Taxpayer timely files a petition with the Tax Court. In the Tax Court trial, discuss whether, and if so why, Taxpayer successfully may contest the issue of section 6663 fraud.

Question P-26. (2 minute/s) Explain the meaning of "burden of proof."

Question P-27. (4 minute/s) Discuss which party in a Tax Court trial has the burden of proof as to various issues.

Question P-28. (2 minute/s) Define and explain "judicial notice."

Question P-29. (2 minute/s) Define and explain the best evidence rule.

Question P-30. (2 minute/s) Explain what is necessary to enter a document into evidence in a Tax Court proceeding.

Question P-31. (3 minute/s) Explain the business records exception to the hearsay rule.

Question P-32. (3 minute/s) The IRS asserted a deficiency against Taxpayer with respect to Taxpayer's 1993 tax return due to unreported interest received by Taxpayer, and the IRS also asserted a penalty under section 6663 for such unreported income. Taxpayer filed a petition with the Tax Court, and during the Tax Court trial the respondent called as a witness A who testified that A telephoned Taxpayer on April 13, 1994. A further testified that Taxpayer said Taxpayer was working on Taxpayer's income tax return and had decided not to report any interest income, even though Taxpayer knew the interest was taxable, because the IRS never would find out about the interest.

(a) Explain whether A's testimony is relevant evidence.

(b) Explain how the telephone call may be sufficiently authenticated in order to be admissible.

(c) Explain whether A's testimony as to Taxpayer's statement over the telephone is not admissible into evidence because it is hearsay.

Question P-33. (2 minute/s) Counsel for petitioner calls petitioner to testify at the Tax Court trial. Petitioner testifies regarding cash charitable gifts that are in controversy. Counsel for the respondent does not cross-examine petitioner. Counsel for petitioner then calls a witness and inquires regarding the credibility of petitioner. Counsel for respondent objects to the Question as irrelevant and immaterial. How should the court rule?

Question P-34. (4 minute/s) Explain (a) "opinion" testimony in a Tax Court trial and (b) the circumstances under which a witness will be permitted to give opinion testimony.

Question P-35. (2 minute/s) Discuss whether the Tax Court may determine a deficiency including a penalty due to fraud if the petitioner generally fails to cooperate, fails to show for the trial, and the IRS files a motion for summary judgment against the petitioner.

Question P-36. (3 minute/s) Pursuant to a search warrant, federal law enforcement officers searched the carry-on baggage Taxpayer carried on a commercial airline flight. The federal law enforcement officials discovered and seized a large sum of cash in the baggage. The IRS did not participate in or have advance knowledge concerning the search and seizure. The IRS then made a termination assessment against Taxpayer as possessor of the cash. In a federal court proceeding involving the seized cash, the court granted Taxpayer's request to suppress the evidence because of the violation of Taxpayer's constitutional rights. In the Tax Court proceeding, Taxpayer moves to suppress introduction of evidence relating to the cash and for summary judgment on the basis that the illegally seized cash is not admissible and that the notice of deficiency is without foundation and is invalid as a matter of law. Discuss how the Tax Court should rule on the motion.

Question P-37. (2 minute/s) The IRS sends to Taxpayer a deficiency notice asserting a penalty due to fraud under section 6663. Taxpayer testifies in the Tax Court trial on the fraud issue. When counsel for respondent cross-examines Taxpayer, counsel for respondent inquires regarding alleged bank fraud activities by Taxpayer. Counsel for Taxpayer objects to the Question as irrelevant and exceeding the scope of direct examination. Discuss how the Tax Court should rule on the objection.

Question P-38. (3 minute/s) A medical doctor specializing in plastic surgery is testifying in a Tax Court trial on the issue of whether the petitioner is eligible for a medical expense deduction under section 213. The plastic surgeon has been called by counsel for petitioner regarding the issue of whether a medical procedure performed on petitioner was to meaningfully promote the proper function of the body due to a congenital abnormality.

On cross-examination, counsel for respondent inquires of the witness about a treatise that the witness identifies as a source of information highly regarded throughout the plastic surgery profession. Counsel for respondent offers the treatise for admission into evidence. Counsel for petitioner objects. Discuss whether the treatise may be admitted, and if so, in what manner.

Question P-39. (2 minute/s) Define "relevant evidence."

Question P-40. (2 minute/s) Explain whether all relevant evidence necessarily is admissible.

Question P-41. (4 minute/s) Describe briefly the essential elements of the small tax case procedures that may apply in the Tax Court.

Question P-42. (3 minute/s) A and B, husband and wife, file a joint return for taxable year 1992. A generated all the economic activity for the family; B was not employed. A and B receive a statutory notice of deficiency for the 1992 return, and they approach you to represent them. You agree to represent both A and B, you prepare a joint petition, and each of A and B signs the petition. Shortly before trial, you are advised that A and B have decided to obtain a divorce. What are your responsibilities under the Tax Court Rules?

Question P-43. (2 minute/s) Describe the certifications, if any, counsel for petitioner makes as to the merits of petitioner's position by signing a Tax Court petition.

Question P-44. (2 minute/s) Under what circumstances may a Tax Court judge suspend counsel from practice before the Court for no more than 60 days?

Question P-45. (5 minute/s) Explain the circumstances under which and the extent to which the Tax Court may award costs (including attorney fees) to a petitioner.

Question P-46. (3 minute/s) Taxpayer received a deficiency notice and timely filed a pro se petition with the Tax Court. Thereafter, Taxpayer failed to respond to the IRS informal communications. Until two days prior to trial, Taxpayer failed to respond to IRS formal communications and failed to comply with the Tax Court orders to respond. At trial, Taxpayer submits to the Tax Court documents that the Court finds to be fraudulently altered. The IRS moves for sanctions under section 6673. Discuss whether the Court may impose section 6673 sanctions upon Taxpayer.

Question P-47. (2 minute/s) Describe the effect of a taxpayer executing an IRS Form 870-AD, Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.

Question S-2. (3 minute/s) Taxpayer filed a federal income tax return for taxable year 1992 on April 15, 1993. In the 1992 return, Taxpayer claimed, as in itemized deduction, state income taxes paid during 1992. During 1993, Taxpayer applied for and received a refund of part of the state income taxes for which the deduction had been taken on the 1992 federal income tax return. Describe the federal income tax consequences of the receipt of the refund in 1993.

Question S-3. (3 minute/s) Taxpayer was the sole owner of the stock of Taxpayer, Inc. Taxpayer sold shares of the stock to Taxpayer's child at fair market value, with the purchase price payable by the child in annual installments over a 20 year period and evidenced by interest-bearing promissory notes. The promissory notes provided that, unless the notes previously had been paid, they would be "deemed cancelled and extinguished as though paid" upon Taxpayer's death. Taxpayer died two years after the sale of the stock (with 18 installments unpaid). Pursuant to the terms of the notes, Taxpayer's executor treated the notes as discharged, and the child paid nothing to Taxpayer's estate. Describe the income tax consequences of the cancellation of the notes.

Question S-4. (10 minute/s) State the amount (without any further explanation), if any, of each of the following items that constitutes gross income to Taxpayer (unless a Question asks for other information) (treat each part separately; do not cumulate amounts):

(a) $10,000 gross wages from employment ($8,000 net of federal taxes).

(b) $5,000 end-of-the-year bonus from employer ($3,500 net of federal taxes).

(c) $10,000 received as a winner of the state lottery ($7,000 net of federal taxes).

(d) $300 stolen from a convenience store in a robbery.

(e) $220,000 received as winner of the Nobel Prize in physics; Taxpayer accepted the prize and used the proceeds to buy a vacation home.

(f) $5,000 of interest received on a State of Iowa bond used to finance the construction of new county courthouses.

(g) Gain realized of $2,000 upon sale of State of Iowa bond.

(h) $3,000 of interest received by Taxpayer on U.S. Treasury note.

(i) $12,000 cash gift from Taxpayer's father.

(j) Resort home in Colorado received as an inheritance when Taxpayer's uncle died; fair market value as of date of (1) death of uncle is $130,000 (2) receipt is $150,000.

(k) $5,000 received from a testamentary trust created according to the terms of the will of Taxpayer's parent who died during the year. The parent's will provided that all income of the trust (but no principal) 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 Taxpayer's then living lineal descendants.

(l) $2,000 received as an annual annuity payment from an insurance company. Fifteen years ago, when Taxpayer had a life expectancy of 10 years, Taxpayer invested $15,000 in the annuity contract, which provided for $2,000 annual payments until Taxpayer's death.

(m) Taxpayer was an employee, and each of the employer's employees was a participant in the employer's health plan. The health plan provided each employee with health insurance for the employee and his or her dependent family members. In 1994, no benefits were paid to Taxpayer pursuant to the health insurance. The 1994 insurance cost to the employer for Taxpayer was $900. The 1994 insurance cost to the employer for Taxpayer's family was $600.

(n) Rolex watch (fair market value of $7,000) received from one of Taxpayer's business associates whose card attached to the watch contained the following message: "Thanks for all the business that you have directed my way this year. I look forward to a continuing and mutually beneficial business relationship with you." Taxpayer and the business associate otherwise were not social friends.

(o) $50,000 lump-sum proceeds of life insurance policy on the life of Taxpayer's parent. The policy was purchased and owned by Taxpayer's parent and the proceeds were payable to Taxpayer.

(p) Taxpayer was indebted to the Last Independent Bank in the amount of $20,000, and Taxpayer's employer paid the debt in order to avoid adverse publicity about the Taxpayer.

(q) Taxpayer works for a retail variety store. Taxpayer's employer has an employee discount program available to all employees. The employee discount is 25% of the retail sales price. During 1994, Taxpayer purchases under the employee discount plan one item from the retail store with a retail price of $2,000 by paying $1,500. During 1994, the employer's sales were $10,000,000 and its cost of goods sold was $8.000.000.

(r) Same facts as (q) above, but state the amount of Taxpayer's basis in the item acquired.

(s) In 1989, Taxpayer had purchased an antique table at an antique gallery in Hope, Arkansas, for $500. In 1994, it was discovered that the table was worth $4,000 because it had been in the childhood home of William Jefferson Clinton. Taxpayer retained the table for use at Taxpayer's home. During the 1994 examination of the table to confirm its authenticity, a letter addressed to Clinton from Richard M. Nixon was found wedged in a corner of the table. The letter was appraised as having a fair market value of $1,000. Taxpayer retained the letter in Taxpayer's safe deposit box for the rest of 1994. State the amount of gross income to Taxpayer in 1994 with respect to the table.

(t) Same facts as (s) above. State the amount of gross income to Taxpayer in 1994 with respect to the Nixon letter.

Question S-5. (3 minute/s) Describe the federal income tax consequences of the receipt in 1994 of damages received in satisfaction of claims (relating to events occurring after 1991), under Title VII of the Civil Rights Act of 1964 and 42 U.S.C. 1981, of disparate treatment discrimination (denial of promotion based on gender and race). The damages were received for back pay and compensatory damages for emotional pain and suffering, inconvenience, mental anguish, and other nonpecuniary losses.

Question S-6. (3 minute/s) Taxpayer received compensatory and punitive damages from a public utility (natural gas) company for personal physical injuries received when Taxpayer's home was destroyed by a gas explosion attributable to the gross negligence of the gas company. Discuss whether (and if so, why) the punitive damages are excludable from gross income.

Question S-7. (3 minute/s) Discuss what weight the Tax Court will give, for purposes of Taxpayer's qualification for the section 104 exclusion, a state trial court judgment that incorporates a settlement agreement between Taxpayer and the defendant that allocates the settlement payment amount to the various claims asserted by Taxpayer (lost profits, mental anguish, and punitive damages).

Question S-8. (3 minute/s) Discuss briefly the substantiation requirements that a taxpayer must satisfy in order to obtain deductions for business travel expenses.

Question S-9. (3 minute/s) Taxpayer (engaged in business as a sole proprietor) travels from Mule Shoe, Texas (Taxpayer's tax home), to Metropolis, New York, to meet with customers. Taxpayer departs Mule Shoe on Sunday afternoon and flies to Metropolis. The cost of this round-trip flight is $800. From Monday through Thursday, Taxpayer makes business calls on customers. On Wednesday evening, Taxpayer takes two customers out to dinner during which they discuss trends in the industry, new products generally, Taxpayer's new product line, and the complaints that the two have against Taxpayer's products or personnel. Taxpayer pays $150 for the meal. After dinner, the group walks through Metropolis Square and is offered tickets to a very-hard-to-get-into Broadway show. Taxpayer buys three tickets for $100 each, even though the price printed on the ticket is $40 each. Taxpayer and the two customers attend the play and do not discuss any business during or after the play. Taxpayer's business calls were so successful that Taxpayer decides to spend Friday through Sunday on vacation at the beach in Metropolis. Taxpayer returns to Mule Shoe on Sunday evening.

(a) Discuss the extent to which Taxpayer may deduct the $800 air fare expense.

(b) Discuss the extent to which Taxpayer may deduct the $150 meal expense.

(c) Discuss the extent to which Taxpayer may deduct the $300 paid for the tickets for the Broadway play.

Question S-10. (3 minute/s) Discuss the extent to which law school education-related expenses may be deducted by a surgeon who, in recent years, had realized the vast majority of his income from testifying as an expert witness in medical malpractice lawsuits. The surgeon does not intend to practice law upon completion of law school and will not take the bar exam.

Question S-11. (3 minute/s) Describe the rules as to the deductibility of unreimbursed business travel expenses incurred by an employee posted, on a nonpermanent basis, to a work location several hundred miles away from the employee's permanent place of work.

Question S-12. (4 minute/s) Taxpayer owns a cabin in West Jellystone, Montana, and Taxpayer rents the cabin to unrelated persons for 90 days during 1994 and uses it for personal purposes for 30 days during 1994. Taxpayer receives rental income of $9,000 from the cabin, pays property taxes on the cabin of $4,000, pays $6,000 of otherwise allowable interest on debt secured by the cabin, incurs allowable depreciation of $3,000, and pays maintenance and operating expenses of $8,000. Assuming that the interest will be "qualified residence interest" for purposes of section 163(h)(3) and ignoring 183 for purposes of this Question:

(a) Discuss and quantify the amount of maintenance expenses that will be deductible.

(b) Discuss and quantify the amount of depreciation expenses that will be deductible.

Question S-13. (3 minute/s) On June 1, 1994, the amount of the first mortgage debt secured by Taxpayer's principal residence was $975,000, and the value of the residence was $1,025,000. Taxpayer obtained a loan in the amount of $200,000 that was secured by a second mortgage on the residence. The $200,000 proceeds of the second mortgage loan were used by Taxpayer to purchase a helicopter for recreational flying. Discuss and quantify the principal amount of the second mortgage debt on which interest is deductible in 1994.

Question S-14. (2 minute/s) Taxpayer's salary as an employee of a professional corporation is $300,000 per year. In addition, Taxpayer receives $20,000 of dividends from investment property. Taxpayer also owns an interest as a limited partner in a Partnership 1 (interests in which are not traded on an established securities market and are not readily traded on a secondary market or the substantial equivalent thereof) that owns and operates an office building, and Taxpayer's distributive share of the partnership loss is $30,000. Discuss and quantify the amount of the distributive share of the Partnership 1 loss that Taxpayer will be allowed to deduct in calculating taxable income.

Question S-15. (2 minute/s) Same facts as Question 14., except that in the same taxable year Taxpayer also owns a limited partnership interest in another partnership, Partnership 2 (interests in which are not traded on an established securities market and are not readily traded on a secondary market or the substantial equivalent thereof), that owns and operates a motel. Taxpayer's distributive share of Partnership 2 income is $20,000. Discuss and quantify the amount of the distributive share of the Partnership 1 loss that Taxpayer will be allowed to deduct in calculating taxable income.

Question S-16. (8 minute/s) Taxpayer and Spouse separated in 1993 and are divorced in 1994. Pursuant to the terms of the divorce settlement agreement, which the divorce court approved and adopted as its order, Taxpayer is required to make the following transfers to Spouse:

Property settlement payments in 1994: (1) $75,000 in cash and (2) Whiteacre (Taxpayer's separate property), which has a value of $100,000 and an adjusted basis to Taxpayer of $125,000.

Spousal support in cash: (1) $100,000 in 1994, (2) $90,000 in 1995, (3) $60,000 in 1996, and (4) $50,000 per year after 1996 until the death or remarriage of Spouse.

Child support payments in cash of $8,000 per year until Junior, the child of Taxpayer and Spouse, attains the age of 21 years.

The divorce settlement agreement and the court order are silent as to the tax consequences of the various payments. Taxpayer makes all required payments.

(a) (1 minute/s) State the amount of gross income to Spouse as to the 1994 cash payment of $75,000 as part of the property settlement.

(b) (1 minute/s) State the amount of gross income to Spouse as to the 1994 transfer of Whiteacre as part of the property settlement.

(c) (1 minute/s) State the amount of Spouse's adjusted basis in Whiteacre on the date of receipt.

(d) (1 minute/s) State the amount of gross income to Spouse in 1994 attributable to the $100,000 cash payment as spousal support.

(e) (4 minute/s) State the amount of gross income to Taxpayer in 1996 attributable to the spousal support payments made by Taxpayer in 1994-96.

Question S-17. (2 minute/s) Compare and contrast the legal liability of a husband and wife for unpaid federal income tax who file either (a) a joint return or (b) separate returns.

Question S-18. (2 minute/s) On April 4, 1990, Taxpayer purchased 1,000 shares of QWE, Inc., stock at $30 per share and incurred a brokerage fee of $1,000. On November 2, 1994, Taxpayer sold the 1,000 shares of QWE at $35 per share and incurred a brokerage fee of $2,000. Quantify the amount of Taxpayer's gain or loss realized on November 2, 1994.

Question S-19. (6 minute/s) In 1992, Taxpayer acquired unimproved real property with a fair market value of $300,000. The terms of the acquisition were as follows: Taxpayer paid $200,000 cash and executed a $100,000 first mortgage indebtedness (for which Taxpayer was personally liable) to the seller. In 1993, Taxpayer borrowed $50,000 from a bank, in return for which Taxpayer executed in favor of the bank a nonrecourse note (no personal liability to Taxpayer) and a second mortgage on the property. The $50,000 proceeds of the loan were used to construct a building on the property. In 1994, Taxpayer received an offer to buy the property, which Taxpayer accepted. Buyer paid $300,000 cash, assumed the first mortgage debt of $75,000 (Taxpayer had paid down the debt from $100,000 to $75,000), and took subject to the second mortgage debt of $50,000.

(a) (2 minute/s) Quantify Taxpayer's basis in the property at the time of acquisition.

(b) (2 minute/s) Describe the federal income tax consequences of the 1993 borrowing and second mortgage transaction.

(c) (2 minute/s) Quantify Taxpayer's amount realized upon the sale of the property to Buyer in 1994.

Question S-20. (10 minute/s) On January 1, 1990, Taxpayer acquired 1,000 shares of X Corporation's common stock, which constituted all of the stock outstanding, at a cost of $100,000. On December 31, 1992, when its earnings and profits were $1,000, X issued a pro rata preferred stock dividend. Taxpayer received 1,000 shares of preferred stock with a total fair market value of $50,000. Immediately after the distribution, X's common stock had a total fair market value of $200,000.

(a) (4 minutes) Discuss briefly and quantify the tax consequences to Taxpayer if in 1994 Taxpayer sold the preferred stock to another individual for $50,000, and X had earnings and profits of $50,000 for 1994.

(b) (3 minutes) Discuss briefly and quantify the tax consequences to Taxpayer if on December 31, 1994, X's earnings and profits were $35,000 and X redeemed the preferred stock for $50,000.

(c) (3 minutes) Discuss briefly and quantify the tax consequences to Taxpayer if on December 31, 1994, X's earnings and profits were $50,000 and X redeemed the preferred stock for $50,000.

Question S-21. (4 minute/s) Taxpayer is a corporation the stock of which is publicly traded over-the-counter, and the five members of the board of directors own less than 30 percent of the stock of Taxpayer. Taxpayer has accumulated amounts of earnings and profits in excess of the reasonable needs of the business. Discuss whether Taxpayer may avoid imposition of the accumulated earnings tax by offering other proof, and if so, what type of proof would be relevant.

Question S-22. (8 minute/s) Describe in general terms the federal income taxation of the periodic income of and distributions from a Subchapter S corporation (that is organized in 1994 and immediately elects Subchapter S status).

Question S-23. (4 minute/s) Define the meaning of the term "limited liability company" and discuss whether such an entity is subject to the corporate income tax.

Question S-24. (6 minute/s) A, B, and C decided to form a general partnership (which would not be treated as an investment company under section 351 if incorporated). Under the terms of the partnership agreement, the partners were to receive a 30 percent, 30 percent, and 40 percent interest, respectively, in partnership capital; profits and losses were to be shared in the same proportion. The partners made the following contributions in 1994 in exchange for their partnership interests:

Partner	Contribution			Adjusted Basis	Fair Market Value

A	Unimproved real property	$30,000		$50,000*
B	Cash				$30,000		$30,000
C	Securities**			$35.000		$40.000

* The real property has a total fair market value of $50,000, but the
property is encumbered by a $20,000 mortgage indebtedness. A purchased
the real property in 1990 as an investment. The partnership receives
the property subject to the $20,000 mortgage indebtedness.

** C purchased the securities as an investment in 1992.

(b) (3 minutes) Discuss and quantify each partner's adjusted basis in his or her partnership interest upon formation.

Question S-25. (4 minute/s) Taxpayer's father was in declining health and appointed Taxpayer as his agent under a durable power of attorney. For many years, Taxpayer's father had made cash gifts to his children during December. Pursuant to the power of attorney, Taxpayer prepared gift checks drawn against the father's checking account. Taxpayer prepared a check for Taxpayer and for each of Taxpayer's siblings. The checks were prepared on December 15, 1993, and were delivered on December 20, 1993. All of the checks were deposited in the respective donee's checking account by the end of 1993, but one of the checks had not cleared against the father's checking account until January 2, 1994. The father's checking account had sufficient funds to honor each of the checks. Explain whether Taxpayer's father has made a completed gift in 1993 as to the check that did not clear against his account until 1994.

Question S-26. (3 minute/s) Taxpayer establishes an inter vivos trust in 1990, the provisions of which grant the trustee discretion, not limited by an ascertainable standard, to distribute trust property to Taxpayer's adult children. An independent corporate trust department is named trustee. Taxpayer retains the power to remove the corporate trustee without cause and to substitute another corporate trustee. Taxpayer dies possessing the power to substitute corporate trustees. Discuss whether the trust property is includible in Taxpayer's gross estate.

Question S-27. (5 minute/s) Describe the types of transfers to a surviving spouse (who is a U.S. citizen) that will qualify for the estate tax marital deduction.

Question S-28. (2 minute/s) Taxpayer's will provided that Taxpayer's executor has the power to charge any expenses against income or principal or apportion the same. The will also provides for a marital deduction bequest to Taxpayer's spouse (if surviving) and states that it is Taxpayer's purpose to maximize the marital deduction so as to minimize federal estate tax payable at Taxpayer's death. The residue of Taxpayer's estate (the amount equal to Taxpayer's unified credit exemption equivalent) goes to Taxpayer's children. During the administration of Taxpayer's estate, the estate realizes income of $200,000 and incurs administration expenses of $150,000, which the executor allocates against income (as required by Taxpayer's will and state law) and deducts for federal income tax purposes on the estate's form 1041. Each Form 1041 contained a statement pursuant to section 642(g) stating that the claimed expenses had not been allowed as deductions on the Taxpayer's estate tax return and waiving any right to so claim them. Discuss whether the marital deduction available to Taxpayer's estate will be reduced because of the administration expenses.

Question S-29. (4 minute/s) Describe how a taxpayer may avoid the "substantial understatement" penalty as to a return due after December 31, 1993.