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Fid Income Tax 2013 Final Exam




Question;Most of these questions can be answered in a paragraph or two. Please give meenough substance in each answer so that I know that you know the answer.Simple vs. Complex Trusts.The following information will be used to answer the following seven (7)questions. The last three questions are based on independent informationsupplied with those questions.The trustee of ABC Trust is required to make distributions to certain incomebeneficiaries and is allowed to make distributions to other incomebeneficiaries at her discretion. ABC trust has two groups of beneficiaries:Income beneficiaries and remainder beneficiaries who will receive the trustproperty when it is terminated after a set period of time. There is very littleoverlap between these two groups of beneficiariesi.e., for the most part,the income beneficiaries are different people from the remainderbeneficiaries. In a typical year, about 75% of the trusts DNI will bedistributed to beneficiaries. Included in the trusts property are several stripmallsi.e., rental properties. Depreciation is determined using the MACRS(straight-line) method. This depreciation calculation is used for all trustpurposes.1. Is ABC Trust a simple trust or a complex trust? Explain yourreasoning.2. Regarding the personal exemption, will ABC Trust qualify for the$100, $300, or $600 personal exemption? Explain your reasoning.3. If there is no reserve for depreciation mentioned in the trustdocuments, what determines who (or what) deducts the depreciation?Explain your reasoning.4. A "reserve for depreciation" is implemented by both words in thetrust document and by the manner in which depreciation is allocatedbetween income and corpus. If there is a "reserve for depreciation," isthe depreciation charged against income or against corpus? Explainyour reasoning.Page two5. Recall that there are two different groups of beneficiaries withcompeting interests (i.e., what's good for one group is bad for theother group). Which group of beneficiaries would benefit from therebeing no reserve for depreciation? If you wish, you may answer thisquestion by addressing which group of beneficiaries is disadvantagedfrom there being no reserve for depreciation. In either case, explainyour reasoning.6. Recall that ABC Trust likely will not distribute 100% of its DNI.From purely a Federal income tax perspective, why would it beunwise for there not to have been a "reserve for depreciation"stipulated in the trust documents?7. 100% of ABC Trust's "fiduciary fees" were deductible on the trust'sform 1041. Assuming that this is a correct and proper determination,what does this fact imply regarding the source(s) of income includedon ABC Trust's "income statement"?8. What is the basic definition of "income (or deductions) in respect to adecedent" (IRD or DRD)? What are the Federal income tax and estate taxconsequences of an item being classified as IRD or DRD? Give threespecific examples of IRD or DRD.9. Sec. 691(c) Deduction.Jane died in 2009 with a taxable estate of $5.5 mil. Included in Jane'sgross estate was an traditional IRA valued at $100,000, which wasbequethed to James, her widow. This was the only IRD item included inJane's estate.Determine the amount of the sec. 691(c) deduction that James wouldwould be eligible to deduct on his individual income tax return.Now, assume that the beneficiary of this IRA was Jane's brother,rather than her husband. Determine the amount of the sec. 691(c)deduction that Jane's brother would would be eligible to deduct on hisindividual income tax return.10. Explain at least two reasons/provide examples, as to why someestates may remain open for a decade, or more, after the death of adecedent.


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