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Unformatted text preview: and is not subject to tax. [See p. 25-17.] Solutions to Problem Materials 25-7 25-30 a. b. Because the uncollected $14,500 income that K earned before his death could not be included in his final cash basis individual income tax return, it must be classified as income in respect of a decedent and taxed to K's estate when it is received. The $1,600 debt to K's attorney is a personal debt that would not have resulted in a business deduction when paid by K. Therefore, the payment of the debt by K's executor does not result in a deduction in respect of a decedent. (See pp. 25-11 and 25-12 and 691.) If K had been an accrual basis taxpayer, the $14,500 earned income would have been properly reported on K's final income tax return even though the receivable was not collected prior to K's death. The subsequent receipt of $14,500 cash by the executor would have no income tax consequence. (See pp. 25-11 and 25-12 and 691.) Because Z is a cash basis taxpayer and did not receive an interest payment prior to her death, no amount of capital gain or interest income is includible on her final income tax return. [See pp. 25-11 and 25-12 and 691(a).] The amount of $18,000 interest income, accrued as of the date of Z's death, represents income in respect of a decedent (IRD) and is taxable to the estate under 691(a). The remainder of the interest ($1,700) was earned by the estate and is taxable under the general rule of 61. The receipt of the $20,000 principal payment triggers recognition of $15,000 of capital gain under 453(c). $150,000 gross profit on sales of land 75% gross profit percentage $200,000 contract price Principal payment Gross profit percentage Capital gain $20,000 75% $15,000 25-31 a. b. The $15,000 capital gain is taxed to the estate as IRD. [See pp. 25-11 and 25-12 and Reg. 1.691(a)-5.] c. IRD collected by the estate totals $33,000. The total IRD included in Z's taxable estate is $168,000 ($18,000 accrued interest plus $150,000 deferred capital gain on the installment sale). $33,000 $10,000 estate tax attributable to total IRD $1,964 $168,000 Therefore, the estate may deduct $1,964 under 691(c). [See Example 8, p. 25-12 and Reg. 1.691(c)-1.] TAX RETURN PROBLEMS
A completed 2010 Form 1041, Schedule D, and Schedule K-1 for the MKJ Problem (25-32) are contained in the Instructor's Resource Guide and Test Bank for 2012. TAX RESEARCH PROBLEMS
Solutions to the Tax Research Problems (25-33) are contained in the Instructor's Resource Guide and Test Bank for 2012....
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This note was uploaded on 02/05/2012 for the course ACCT 110 taught by Professor Smith during the Spring '11 term at Adrian College.
- Spring '11