Accounting 26 questions-Distributable Net Income (DNI) done june 2015

1. Distributable Net Income (DNI)

a.will vary depending on the number of estate/trust beneficiaries.

b. applies to estates but not trusts.

c. as a general rule does not include capital gains.

d. does not limit the amount that can be taxed to the estate/trust beneficiaries.

2. Net operating loss and capital loss pass throughs in the year of entity termination

a.will not be useful to beneficiaries unless they itemize deductions on their income tax returns.

b. cannot be used by married beneficiaries who file separate rather than joint 1040s.

c. will be useful to beneficiaries even if they do not itemize deductions.

d. can only be used by beneficiaries who are engaged in operating closely held businesses or have capital gains.

3. The trust's final tax termination year ends on June 30. The trust realized $5,000 on capital gain on May 1. The capital gain income

a. will be taxed to the trust as not part of DNI.

b. will be included in DNI.

c. cannot be offset by capital losses in year of termination.

d. will be taxed separately to the beneficiaries but is not part of DNI.

4. A foreign trust

a. has diplomatic immunity.

b. is a trust having a situs in a state other than in the state where the grantor dies.

c. is not subject to the jurisdiction of a U.S. court and is not supervised by a U.S. person.

D. must terminate within 5 years of creation unless an extension(no more than one year) is granted by the IRS.

5. Decedent at death owned a mortgage in the principal amount of $100,000 @ 5% interest that he obtained when he sold real estate for that amount and financed the transaction. He'd paid $50,000 for the real estate originally. When he died he had not received any installment mortgage payments. A federal estate tax return was not required for his estate

a. post-death installment payments will represent income in respect of a decedent only with respect to the interest payment included in each installment.

b. post-death installment payments will represent income in respect of a decedent with respect to the interest payment included in each installment and with respect to the capital gain included in each installment.

c. no part of each installment represents income in respect of a decedent.

d. no part of the installments represents income in respect of a decedent because of the section 1014 adjustment to basis.

6, An Electing Small Business Trust

a. can have no more than 5 natural persons as life/income beneficiaries.

b. can have a fair market value of no more than $1million at any time during its taxable year.

c. must have a corporate fiduciary ,e.g., a bank with trust powers, as one of its co-trustees or as sole trustee.

d. preserves the S status of an S corporation.

7. Which of the following statements is incorrect?

a. The income tax rates applied to trusts and estates are highly compressed compared to income tax rates for individuals.

b. Form 1041 is the income tax return for most types of trusts and estates.

c. Form 1041 illustrates the conduit theory of income taxation since all taxable income received by an estate or trust is taxed twice, like a C corporation.

d. The taxation of estates and trusts is governed by Subchapter J of the Internal Revenue Code.

8. Jill's will states in part "I give, devise and bequeath the sum of $10,000 to Mary". Jill's personal representative, being short of cash, distributes 100 shares of xyz corporation to Mary in satisfaction of her bequest. On date of distribution the 100 shares of XYZ Corporation stock are worth $10,000. The estate's basis in the stock is $5,000. This transaction results in

a. realization and recognition of $5,000 capital gain by the estate.

b. Mary will taxed on ordinary income of $5,000 assuming there is enough DNI to cover this amount.

c. Mary will be taxed on ordinary income of $10,000 assuming there is enough DNI to cover this amount.

d. Mary will not be taxed because she received specific property, i.e., the XYZ stock, instead of cash.

9. On his 2012 1040 Bill reported DNI of $5,000 as reported to him by the personal representative of an estate of which he was a beneficiary. He just received a letter from the IRS claiming that the personal representative was in error and Bill should have reported $7,000 of DNI on his 2012 1040. The IRS is demanding more income tax from Bill. The statute of limitations has expired on the 1041 filed by the personal representative that reported the $5,000 of DNI. The statute of limitations has not expired on Bill's 2012 return. Will the IRS be successful in claiming more income tax from Bill?

a. Maybe

b. Don't know

c. Yes

d. No

10. The decedent's will reads in part "I give, devise and bequeath to Mary a sum of money equal to the value of one-third of my residuary estate as finally determined."

a. this is a devise of a specific sum of money and Mary will receive it from the estate income tax free.

b. this is not a devise of a specific sum of money and Mary will be taxed on it to the extent of her share of DNI.

c. satisfaction of this devise will always result in capital gain to the estate.

d. satisfaction of a devise so worded violates the rule against perpetuities.

11. A qualified revocable trust

a. is limited to a calendar income tax year.

b. must be distributed 100% to a charitable beneficiary upon the death of the grantor.

c. can be treated as an estate with respect to income tax return filing if the proper election is made.

d. is not subject to Subchapter J.

12. During its taxable year the estate received $35,000 of interest and rental income. The personal representative had few deductions left to reduce the amount of taxable income for that year. The personal representative had made no distributions during the tax year that would have carried out DNI for taxation to the residuary beneficiaries at presumably much lower tax rates. Is the personal representative out of luck?

a. yes and the PR will have a lot of explaining to do to the residuary beneficiaries.

b. no because the estate residuary beneficiaries were already entitled to the income and will be taxed on it regardless of whether it's actually distributed.

c. yes because an order from the probate court will be required to correct the error and the IRS is not bound by state court decisions.

d. no, not if the PR promptly makes sufficiently large estate distributions to the residuary beneficiaries and within 65 days after the end of the tax year.

13. A trustee distributes $10,000 of income to each of nine trust beneficiaries during its tax year. The trust had $40,000 of tax-exempt interest (municipal bond interest) and $80,000 of corporate bond interest during its tax year. The trust agreement does not specify the type of income to be distributed to each beneficiary. How much of the $10,000 to each beneficiary is taxable income to the beneficiary.

a. none.

b. $6,667.

c. $3,333.

d. cannot be determined from above information.

14. The net operating loss deduction

a. cannot exceed 20% of the estate's or trusts DNI.

b. pass through can be used by a beneficiary regardless of the beneficiary's itemization of deductions.

c. is deductible only on an estate's federal estate tax return.

d. is unavailable to estates and trusts.

15. The decedent's will states in part "I give, devise and bequeath the sum of $20,000 to Joe". The decedent's personal representative writes Joe a check from the estate for $20,000 and in that tax year the estate has $40,000 DNI. Joe will be income taxable on

a. $20,000.

b. $-0-.

c. $20,000 if a first tier beneficiary , zero if a second tier beneficiary.

d. $-0- if the personal representative makes the section 645 election.

16. The will of the decedent established a trust for the benefit of his wife and two sons. The trust states that the trustee shall pay to the widow $25,000 a year and $12,500 a year each to his two sons. There are no charitable contributions. For the current year, the distributable net income of the estate was $48,000. What amount is the widow required to include in her gross income?

a. $25,000.

b. $24,000.

c. $12,500.

d. $12,300.

17. Which one of the following statements is correct?

a. after termination, a trust's unused capital loss carryover expires.

b. a trust takes the decedent's basis in assets left to it by the terms of the decedent's will.

c. after termination, a trust's unused capital loss carryover can be used on the individual tax returns of the beneficiaries who succeed to the trust property.

d. a trust tacks on the decedent's holding period to the trust's holding period for assets left to it by the terms of the decedent's will.

18. By timely filing Form 4810 the personal representative/trustee can

a. reduce the statute of limitations on a filed Form 1041 to 2 years.

b. reduce the statute of limitations on a filed Form 1041 to 1 years.

c. reduce the statute of limitations on a filed Form 1041 to a year and half.

d. amend a timely filed Form 1041.

19. Decedent at death owned 400 shares of xyz having a value as reported on the NY stock exchange of $800 and for which he had paid $300.A federal estate tax was not required for the decedent's estate. The estate sells the 400 shares of XYZ Corporation for $500.

a. the estate recognizes neither capital gain nor loss on the sale.

b. the estate recognizes a short term capital loss on the sale.

c. the estate recognizes a long term capital loss of $300 on the sale.

d. the estate recognizes a short term capital loss of $500 on the sale.

20. The decedent's will states in part " I give, devise and bequeath a one-third share of all the rest, residue and remainder of my estate to my good friend, Tom, in recognition of his faithful service to me for many years."

a. Tom is clearly a Subchapter J beneficiary of the estate.

b. Tom must make a claim against the estate if he wishes to collect.

c. Tom will have to prove his years of service to collect.

d. Tom's one-third share of the residuary estate might be characterized as compensation

income.

21. Gifts or bequests of specific sums of money or of specific property will distributed income tax free to the beneficiary if

a. the fiduciary so elects on the Form 1041 for the estate or trust.

b. they can be paid or distributed only from the income of an estate or trust.

c. paid from the residuary portion of an estate or trust.

d. paid or distributed in not more than 3 installments.

22. Tom, Dick and Harry are the 3 equal residuary beneficiaries of Jill's estate. Jill's personal representative makes a partial estate distribution to each of 100 shares of XYZ Corporation and each 100 share distribution has a basis to the estate of $5,000 and a fair market value on date of distribution of $8,000. Estate DNI in the year of distribution is $20,000. The total DNI that these distributions will carry out for income taxation to the beneficiaries and that will be deductible by the personal representative is

a. $20,000.

b. $15,000.

c. $-0- since these are not cash distributions.

d. $-0-since these are devises of specific property.

23. Tom, Dick and Harry, estate residuary beneficiaries, each received a distribution of property from the estate consisting of 100 shares of XYZ, Inc. The stock constituted original estate inventory. The decedent has paid $1,000 for each 100 share lot and each 100 share lot was worth $2,000 when he died. Dick sold his 100 share lot for $1,500 two months after receiving it. Dick

a. realizes and recognizes a long term capital loss of $500.

b. realizes and recognizes a short term capital gain of $500.

c. realizes and recognizes a long term capital gain of $500.

d. realizes neither gain nor loss.

24. Estate's income tax year is February 1 through January 31. Personal representative makes a distribution to residuary beneficiary Z on March 1, 2014 that carries out $5,000 to Z. Z will report the income

a. on her 2014 1040.

b. on her 2015 1040.

c. on her 2014 1040 if she so elects.

d. on her 2015 1040 if she so elects.

25. The personal representative of Bill's estate received the following items in the current tax year. All of the following are considered taxable income except

a. money damages from a personal injury lawsuit Bill had filed but was settled after his death.

b. income from a partnership.

c. interest

d. dividends.

26. The terms of the governing instrument (will or trust agreement)

a. can trump state law on the subject of estate/trust income and principal definitions.

b. must always defer to state law.

c. must always defer to federal law.

d. cannot be successfully challenged 6 months after date of death (for a will) or creation (for a trust agreement).