Chapter 24

2011 Federal Taxation (with H&R BLOCK At Home(TM) Tax Preparation Software CD-ROM)

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CHAPTER 24—THE FEDERAL TRANSFER TAXES TRUE/FALSE 1. The Federal estate and gift taxes do not represent a major source of revenue for the Federal govern- ment. ANS: T The primary function of the Federal transfer tax system is wealth redistribution, not revenue produc- tion. PTS: 1 REF: p. 14-1 2. In common law systems, married individuals own an equal, undivided interest in all wealth acquired during the course of the marriage, regardless of which spouse made any individual contribution to the marital wealth. ANS: F The question describes community property systems. Common law systems focus on individual own- ership of assets, regardless of the owner's marital status. PTS: 1 REF: p. 14-4 3. If individual A performs legal services for his daughter, the fair market value of the services is subject to Federal gift tax. ANS: F The Federal gift tax is imposed only on property, not on services. PTS: 1 REF: p. 14-5 and Rev. Rul. 56-472, 1956-2 C.B. 21 4. The transfer of municipal bonds, the income from which is not subject to income tax, is subject to the Federal gift tax. ANS: T The Federal gift tax is imposed on transfers of property regardless of the taxability of income gener- ated by the property. PTS: 1 REF: p. 14-5 5. For Federal gift tax purposes, when a transfer is made to an irrevocable trust, the transfer is considered a gift to the beneficiaries of the trust and not to the trustee or the trust itself. ANS: T PTS: 1 REF: p. 14-5 and Reg. § 25.2503-2(a) 6. Donative intent on the part of the donor must be present in order for a transfer to be classified as a "gift" subject to the Federal gift tax. ANS: F Donative intent usually characterizes a taxable gift, but it is not a requirement. PTS: 1 REF: p. 14-6 and Reg. § 25.251 l-l(g)(l)
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7. During 2010, D transfers title to certain investment real estate to her close friends E and F. E is given a life estate in the property and F is given the remainder interest. If the value of the real estate is $200,000 at date of gift, the amount of the taxable gift made by D is $187,000. ANS: T The amount of the taxable gift is the $200,000 fair market value of the property transferred less a $13,000 (in 2010) exclusion for the gift of the current life estate to E. The gift of the remainder interest to F is a gift of a future interest, and is therefore not eligible for the annual exclusion. PTS: 1 REF: Example 5, p. 14-9, and § 2503(b) 8. Even if a transfer is deemed complete for Federal gift tax purposes, the transfer may be incomplete for Federal estate tax purposes, with the result that the value of the transferred assets will be included in the transferor's gross estate. ANS: T The overlap between the gift and estate taxes is discussed on p. 14-13. PTS:
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