ACCT 308 - Chp. 1 Questions (# 19, 21, 23, 25, 41, 50)

Elijah and Anastasia are husband and wife who have five married children and nine minor grandchildren. For 2016, what is the maximum amount they can give to their family (including the sons- and daughters-in-law) without using any of their unified transfer tax credit?

$532,000. 19 donees (5 married children + 5 spouses + 9 grandchildren) × $14,000 (annual exclusion for 2016) × 2 donors (Elijah and Anastasia) = $532,000.

Jake (age 72) and Jessica (age 28) were recently married. To avoid any transfer taxes, Jake has promised to leave Jessica all of his wealth when he dies. Is Jake under some misconception about the operation of the Federal gift and estate taxes? Explain. (3)

- Jake either has a severe misunderstanding as to the rules regarding transfer taxes or is lying to Jessica to delay any parting with his wealth. - The marital deduction allows interspousal transfers (whether by gift or at death) free of any tax (either gift or estate). -There is no tax reason, therefore, in the case of spousal transfers to prefer transfers at death over lifetime gifts. (there's no tax advantage to choose whether to transfer the wealth as a gift or at death) 1. misconception/lying 2. marital deduction (allows interspousal transfers) 3. no tax adavantage

A mother sells a valuable collection of antiques to her daughter for $ 1,000. What judicial concept might the IRS invoke to question this transaction?

- arms length test - possible imposition of a gift tax if over $14,000 - if antique is worth more than $1,000 yet the mother sold it only for $1,000 to her daughter --> her daughter could be giving her daughter a gift of the excess amount it was worth If the collection is worth more than $1,000, the mother has probably made a gift of the excess value to the daughter. Quite possibly the transaction could result in the imposition of a gift tax. Sales or other transactions between related parties are subject to the arm's length test. In this case, for example, would the mother have made this sale for $1,000 if the purchaser had been an unrelated third party?

Mike Barr was an outstanding football player in college and expects to be drafted by the NFL in the first few rounds. Mike has let it be known that he would prefer to sign with a club located in Florida, Texas, or Washington. Mike sees no reason why he should have to pay state income tax on his player's salary. Is Mike under any delusions? Explain. (2)

-If Mike is drafted by a team in one of the listed states, he will escape state income tax on income earned within that state (e.g., training camp, home games). -He will not, however, escape the income tax (state and local) imposed by jurisdictions where he plays away games. Called the "jock tax," it is applied to out-of-state athletes and entertainers. **all of the following states impose an income tax on individuals: Alaska, Florida, Nevada, South Dakota, Texas, Washington, & Wyoming (7) 1. no income tax on the listed states 2. jock tax (state & local taxes) will apply on any away games on any state that imposes them

As to those states that impose an income tax, comment on the following: a. "Piggyback" approach and possible "decoupling" from this approach.

a. For state income tax purposes, "piggyback" means making use of what was done for Federal income tax purposes. By "decoupling," a state decides not to allow a particular Federal provision (e.g., exclusion, deduction, credit) for state income tax purposes.

On a Federal income tax return filed five years ago, Andy inadvertently omitted a large amount of gross income. a. Andy seeks your advice as to whether the IRS is barred from assessing additional income tax in the event he is audited. What is your advice? (3) b. Would your advice differ if you were the person who prepared the return in the question? Explain. (3)

a. Normally, the three-year statute of limitations applies to additional assessments the IRS can make. -However, if a substantial omission from gross income is made, the statute of limitations is increased to six years. -A substantial omission is defined as omitting in excess of 25% of the gross income reported on the return. --> 3yr statute of limitations for additional assessments made by the IRS b. No, it would not. The proper procedure would be to advise Andy to disclose the omission to the IRS. -Absent the client's consent, do not make the disclosure yourself. ***If Andy refuses to make the disclosure and the omission has a material carryover effect to the current year, you should withdraw from the engagement.

As to those states that impose an income tax, comment on the following: b. Deductibility of Federal income taxes.

b. A diminishing number of states allow a deduction for Federal income taxes paid.

As to those states that impose an income tax, comment on the following: c. Credit for taxes paid to other states.

c. Most states allow their residents some form of tax credit for income taxes paid to other states.