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Gift Tax. Betty, a married taxpayer, makes the following
gifts during the current year (2019): $20,000 to her church, $100,000 to her
daughter, and $40,000 ro her husband. What is the amount of Berty’s taxable
gifts for the current year (assuming that she does not elect to split the gifts
with her spouse)?

Estate Tax . Clay, who was single, died in 2019 and has a
gross estate valued at $8,500,000. Six months after his death, the gross assets
are valued at $9,000,000. The estate incurs funeral and administration expenses
of $125,000. Clay had debts amount – ing to $150,000 and bequeathed all of his
estate to his children. During his life, Clay made no taxable gifts.
a. What is the amount of Clay’s taxable estate?
b. What is the tax base for computing Clay’s estate tax?
c. What is the amount of estate tax owed if the tentative
estate tax (before credits) is
$3,235,800?
d. Alternatively, if, six months after his death, the gross
assets in Clay’s estate declined in
value to $7,500,000, can the administrator of Clay’s estate
elect the alternate valuation dare? What are the important factors chat the
administrator should consider as to
whether the alternate valuation date should be elected?
e. How would your answer change in parts a, b, and c if
Clay’s gross estate was $18,500,000
rather than $8,500,000 and the tentative estate tax before
credits was $7,235,800?

Comparison of Tax Entities.
a. Keith Thomas and Thomas Brooks began a new consulting
business on Januar y 1,
2019. They organized the business as a C corporation, KT,
Inc. During 2019, the
corporation was successful and generated revenues of
$2,000,000. KT had operat –
ing expenses of $800,000 before any payments to Keith or
Thomas. During 2019,
KT paid dividends to Keith and Thomas in the amount of
$450,000 each. Assume
that Keith ‘s wife earned $120,000 from her job, they file a
joint return, have itemized deductions of $40,000, and have no children.
Compute the total tax liability
of KT and Keith and his wife for 2019.
b. Instead of organizing the consulting business as a C
corporation, assume Keith and Thomas organized the business as a limited
liability company, KT, LLC. KT made a distribution of $450,000 each ro Keith
and Thomas during 2019. Compute the total tax liability of KT and Keith for
2019. Ignore any additional tax on net investment income.

Partnership Income. Howard Gartman is a 40% partner in the
Horton & Gartman Partnership. During 2019, the partnership reported the
total items below (100%) on its Form 1065:
Howard and his wife Dawn, who file a joint return, also had
the following income and deductions from sources not connected with the
partnership:
Howard and Dawn have two children. During 2019, Dawn had
$4,500 in federal income taxes withheld from her salary and Howard made four
estimated tax payments of $2,500 each ($10,000 total). Compute Howard and Dawn
‘s Federal income tax liability for 2019 and whether they have a balance due or
a tax refund. Ignore the child tax credits.

Interest and Penalties. In 2018, Paul, who is single, has a
comfortable salary from his job as well as income from his investment
portfolio. However, he is habituall y late in filing his federal income tax
return. He did not file his 2018 income tax return until December 4, 2019 (due
dare was April 15, 2019) and no extensions of time to file the return were
filed. Below are amounts from his 2018 return:
Paul sent a check with his return to the IRS for the
balance due of $5,400 . He is relieved that he has completed his filing
requirement for 2018 and has mer his financial obligation to the government for
2018.
Has Paul mer all of his financial obligations ro the
IRS for 2018? If nor, what additional amounts will Paul be liable to pay to the
IRS?

IRS Audits . Which of the following individuals is most
likely to be audited?
a. Connie has a $20,000 net loss from her unincorporated
business (a cattle ranch). She also received a $200,000 salary as an executive
of a corporation.
b. Craig has AGI of $20,000 from wages and uses the standard
deduction.
c. Dale fails to report $120 of dividends from a stock
investment. His taxab le income is $40,000 and he has no other unusually large
itemized deductions or business expenses. A Form 1099 is reported to the IRS.

Statute of Limitations. In April 2019, Dan is audited by the
IRS for the year 2017. During the course of the audit, the agent discovers that
Dan’s deductions for business travel and entertainment are unsubstantiated and
a $600 deficiency assessment is proposed for the tax year 2017. The agent also
examined some prior year returns. The agent discovers chat Dan failed to report
$40,000 of gross business income on his 2015 return. Gross income of $60,000
was reported in 2015. The agent also discovers chat Dan failed to file a tax
return in 2010.
Will the statute of limitations prevent the IRS from issuing
a deficiency assessment for 2017, 2015, or 2010? Explain.

Rick Cabela, a high income client, has contacted you for
advice regarding two new pro – posed business ventures and other tax planning
ideas. Rick already operates a highly successful consulting business that earns
approximately $2,000,000 net after expenses, and he reports this amount on his
personal income tax return. Below are the details: 1:1-51
• Rick is considering the purchase of several apartment
buildings for rental purposes. He believes the apartments would generate a tax
loss of approximately $100,000 in each of the first three years, then operate
profitably thereafter. Rick would like to use the tax losses for the first
three years to reduce his personal income taxes.
• Rick is also considering investment in a blueberry farm.
He intends to purchase some farmland and turn it into a blueberry farm. The
costs in the first year would be the land, equipment, blueberry plants, and
labor to develop the farm. In years 2-4, labor costs and maintenance would be
the primary financial outlays. No revenue would be earned until year 5 when
Rick believes the farm will be very profitable, generating net profits of
approximately $100,000 per year. With the substantial cash outlays in the first
four years and very little revenue, Rick believes the tax losses would reduce
his personal income taxes. Assume the farm is a valid business and Rick
materially partici – pates in the activity of the farm.
• Because of his high income, Rick’s income tax liability is
very high. He read in a financial journal that the contribution of appreciated
stock to a charitable organization is a good idea for tax purposes. He has some
stock in Apple Co. for which he paid $10,000 several years ago, and the shares
are now worth $200,000. For each of the situations above, what are the
principal tax issues that Rick should consider?

Read the following nvo cases and explain why the Supreme
Court reached different con – clusions for cases involving similar facts and
issues:
• CIR v. Court Holding Co., 33 AITR 593, 45-1 USTC 119215
(USSC, 1945)
• U.S. v. Cumberland Public Service Co., 38 AITR 978, 50-1
USTC 119129 (USSC, 1950)

1.
a. Explain the distinction between a deduction and a credit.
b. Which is worth more, a $10 deduction or a $10 credit?
c. Explain the difference between refundable and
nonrefundable credits
2. List the conditions that muse be met in order to claim
qualifying children and qualifying relatives as dependents. Briefly explain
each one.