Tax-Question 2

Question 1

Last year Christian sold a tract of land (basis of $1 million) to Kate (an unrelated party) for $4 million, with a cash down payment of $1 million and notes for the balance. The notes carry a 7.5% rate of interest and mature annually at $1million each over three years. (Christian did not elect out of the installment method). Before any of the notes mature and when they have a fair market value of $2.8 million. Christian gives them to Grace.

a. Disregarding the interest element, what are the Federal income tax consequences of the gift?

b. Suppose that instead of making a gift. Christian dies and the notes pass to his estate. The executor sells the notes for $2.8 million. What is the Federal income tax result?

Question 2

In each of the following independent situations, what bypass(exclusion) amount is available to Ava’s estate when she dies in 2013? Assume that any appropriate procedures are followed, and that elections are made to transfer to Ava and DSUE amount of Al, her deceased husband.

a. Al died in 2009 and never used any of his bypass amount

b. Al died in 2011 and did not use any of his bypass amount

c. Same as part (b). Ava remarried in 2012, and Andy, her second husband, had used $1 million of his bypass amount in making past taxable gifts. Andy predeceases Ava in late 2013.

Question 3

This Assignment will assess your understanding of how best to minimize gift tax liability. You are required to write a 1-page letter to Charles Horn recommending a course of action for the given scenario. Be sure to cite any applicable codes or regulations.

Charles Horn wants his daughter Sharon to get stock that he owns in Grimson Corporation. He acquired the stock two years ago at a cost of $800,000 and it currently has a fair market value of $650,000 . Charles has made prior taxable gifts and is in poor health. He seeks your advice as to whether he should gift the stock to Sharon or pass it to her under his will. Charles has a large capital loss carryover and has no prospect for any capital gains.

a. Write a letter to Charles regarding the tax implications of the alternatives he has suggested. His address is 648 Scenic Drive, Chattanooga, TN 37403.

b. Prepare a memo for your firm’s files on this matter.