1990 Tax Court Admission Examination
Four hours will be allowed to answer all of the questions in the
examination. Each question has been allocated a specific number of minutes
(see the notation in parenthesis at the beginning of each question). Your
answers will be weighted accordingly.
Write your answers legibly in ink in the bound answer book/s furnished you
for this purpose. Write your name on the cover of each answer book that
you use. Identify each answer by the same number as the question.
Remove no pages from your bound answer book/s; you are being furnished
loose sheets of paper for you to use as scratch paper.
This examination is designed to test your overall knowledge of Federal
taxation, procedure, and trial practice, and also to test your competence in
representing taxpayers before the United States Tax Court. The
examination consists of two sections. The first section (80 minutes) deals
with procedural and evidentiary matters, including application of the Tax
Court Rules of Practice and Procedure. The second section (160 minutes)
deals with substantive Federal income, gift, estate, and generation-skipping
transfer taxation. Each section will be graded separately, and you must
show that your qualifications are satisfactory with respect to each section
of the examination.
The only reference materials permitted to be with you during the
examination are (1) a copy of the Internal Revenue Code, and (2) a copy
of the Rules of Practice and Procedure of the Court. You may refer to
these materials in taking the examination.
Clarity and conciseness of expression will be a significant factor in grading
your examination. Answer only the questions that are asked.
Do not inquire of the proctor regarding the examination questions. If you
think a question contains an ambiguity, state the ambiguity, resolve the
ambiguity by stating an assumption in your answer, and then answer the
question based upon your resolution of the ambiguity.
Assume all taxpayers use the cash method of accounting and are
calendar year taxpayers, unless otherwise indicated. All statutory
references are to the Internal Revenue Code, unless otherwise indicated.
Unless indicated to the contrary in a question, assume that all events occur
during November 1990 and apply the tax court rules of practice and
procedure as of November 1990.
The proctor will tell you when you may begin the test, and you will be
given a warning 5 minutes before the examination is over. When time is
called, put your pen down. Absolutely no extension of time is permissible.
When the time for completion of your examination has elapsed, turn in to
the proctor this examination, your answer books, and the materials
furnished to you. If you complete the examination early, you may turn in
the material and leave.
Question P-1. (2 minute/s) Determine whether the Tax Court
has subject matter jurisdiction to hear the case. State YES or NO.
Tax Court Procedure and Evidence
(a) The IRS asserted an underpayment of sec. 3402 withholding taxes
against Taxpayer, a sole proprietor who employed 7 individuals. Taxpayer
petitioned the Tax Court for a review of the asserted underpayment.
(b) Taxpayer, who is engaged in the business of preparing tax returns for
other persons, received from the IRS a notice and demand for penalty
pursuant to sec. 6695(b) for failing to sign the tax returns of some of
Taxpayer's customers, Taxpayer petitioned the Tax Court to challenge the
Question P-2. (2 minute/s) Taxpayer receives a statutory notice
of deficiency and then timely petitions the Tax Court. Before the Tax
Court takes any action with respect to the case, the IRS assesses the tax to
which the petition relates, and Taxpayer files a motion asking the Tax
Court to enjoin the assessment and collection of such tax. Discuss whether
the Tax Court may grant such a motion.
Question P-3. (2 minute/s) Taxpayer petitions the Tax Court,
and the Court enters a decision that Taxpayer overpaid tax. One hundred
and thirty days after the decision of the Tax Court is final, Taxpayer
moves for an order directing that the IRS issue a refund to Taxpayer
because the IRS has failed to make a refund in accordance with the
decision of the Court. Discuss whether the Tax Court may issue such an
Question P-4. (2 minute/s) The taxpayer pays a deficiency
determined by the Tax Court as well as the interest associated with the
deficiency as determined by the IRS. Taxpayer files an appropriate petition
six months after the Tax Court decision becomes final to challenge the
amount of interest payable on the deficiency. Discuss whether the Tax
Court may determine the amount of interest payable on the deficiency.
Question P-5. (2 minute/s) Taxpayer wants the Tax Court to
modify a final decision in an estate tax case to reflect the estate's
entitlement to an administrative expense deduction for interest paid during
an extended payment period under sec. 6166. Discuss whether such a
modification could be accomplished, and if so, how.
Question P-6. (2 minute/s) Taxpayer has received a statutory
notice of deficiency. Taxpayer wants to challenge the deficiency in the
U.S. Tax Court, but wants to avoid the accrual of interest on the asserted
deficiency. Discuss what Taxpayer may do.
Question P-7. (4 minute/s) Discuss whether the statutory notice
of deficiency is valid.
(a) Wife ("W") and Husband ("H") filed joint Federal income tax returns
for their 1976 and 1977 taxable years. W filed a Federal income tax return
in the status of married, filing separately, on June 15, 1982, with respect
to her 1981 taxable year, and the return indicated a new address for W. On
November 30, 1982, the IRS sent a notice of deficiency to W and H with
respect to their 1976 and 1977 taxable years. Although the IRS computer
records contained a different address for W and H, the IRS issued only a
single joint notice concerning W and H's 1976 and 1977 taxable years to
the address its records contained with respect to H. W never received
actual notice of the notices of deficiency, concerning 1976 and 1977, until
the IRS levied on W's bank accounts and put a lien against her house in
1986. Following such levies and lien, W filed an untimely petition seeking
a redetermination of deficiency for taxable years 1976 and 1977.
(b) Same facts as Question 7.(a) except that H actually provided W with a
copy of the notice of deficiency the day after H receives the notice. W and
H then file a timely joint petition with the Tax Court. W then moves to
dismiss W from the proceeding due to lack of jurisdiction because the
notice was not properly issued to W at W's last known address (and
because the IRS could not then issue another notice due to the statute of
Question P-8. (2 minute/s) Taxpayer is a United States citizen
who resides in the Unites States and is physically present in the United
States on January 22, 1990, the date the IRS mailed a statutory notice of
deficiency to Taxpayer regarding Taxpayer's 1988 income tax return.
Taxpayer received the notice on January 28, 1990. What is the last day on
which Taxpayer can timely file a petition with the Tax Court? You may
wish to refer to the following 1990 calendar:
S M T W Th F S
January 1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31
February 1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28
March 1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28 29 30 31
April 1 2 3 4 5 6 7
8 9 10 11 12 13 14
15 16 17 18 19 20 21
22 23 24 25 26 27 28
May 1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31
June 1 2
3 4 5 6 7 8 9
10 11 12 13 14 15 16
17 18 19 20 21 22 23
24 25 26 27 28 29 30
July 1 2 3 4 5 6 7
8 9 10 11 12 13 14
15 16 17 18 19 20 21
22 23 24 25 26 27 28
29 30 31
August 1 2 3 4
5 6 7 8 9 10 11
12 13 14 15 16 17 18
19 20 21 22 23 24 25
26 27 28 29 30 31
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
October 1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31
November 1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28 29 30
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
Question P-9. (1 minute/s) Discuss what document or
documents must be submitted to the Tax Court to effect an amendment to a
pleading after issue has been joined.
Question P-10. (1 minute/s) If a Tax Court petition is silent
with respect to one or more issues raised in the deficiency notice, what is
Question P-11. (3 minute/s) With respect to papers filed with
the Tax Court:
(a) Each original document must be signed by taxpayer's counsel; the
taxpayer may not sign documents submitted to the Court if the taxpayer is
represented by counsel. State TRUE or FALSE.
(b) Each document signed by taxpayer's counsel must contain the counsel's
Tax Court bar number. State TRUE or FALSE.
(c) Except as otherwise provided in the Tax Court Rules, three conformed
copies of each document submitted to the Court, plus the executed
original, must be filed. State TRUE or FALSE.
(d) May a document submitted for filing, but which does not conform to the
Tax Court Rules, be returned by the Clerk unfiled. State YES or NO.
(e) Counsel for taxpayer is a professional corporation. Describe the proper
name (and signature) to be used on documents submitted to the Court by
the professional corporation.
Question P-12. (1 minute/s) Discuss whether informal
discovery is required before use of formal discovery procedures.
Question P-13. (1 minute/s) Tax Court discovery may not be
commenced before what date?
Question P-14. (2 minute/s) The date of the calendar call for a
case is August 21, 1990. By what date must discovery be completed?
Please refer to the calendar in Question P-8 to answer this Question.
Question P-15. (3 minute/s) Under what conditions may
taxpayer take depositions as a method of discovery in the Tax Court?
Question P-16. (2 minute/s) IRS interrogatories consisted of a
request to petitioner to complete blank attached Forms 1040 (for the years
in issue before the Court) and, with respect to each Form 1040, four sheets
of paper on which petitioner was to list: (1) documents in support of each
item on the Form 1040, (2) the relationship of the document to each item,
and (3) his relevant personal knowledge of the item. Explain whether the
IRS interrogatories are valid.
Question P-17. (2 minute/s) Briefly state:
(a) the responsibility of a party to a Tax Court case regarding
(b) whether a stipulation is binding on a party.
Question P-18. (3 minute/s) State the statute of limitations rule
that applies to the following income tax returns (that are properly,
completely, timely, and nonfraudulently filed except as indicated
(a) An income tax return with respect to a deduction claimed on the face
of the return.
(b) An income tax return with respect to a gross income item not included
in the return.
(c) An income tax return that is not signed by the taxpayer.
(d) A fraudulent income tax return.
(e) A fraudulent income tax return for year 1 is filed in year 2, and in
year 3 a nonfraudulent and correct return for year 1 is filed.
Question P-19. (2 minute/s) Discuss the effect of a taxpayer
signing an IRS Form 872-A. Include in your answer a discussion of
termination of the IRS Form 872-A.
Question P-20. (2 minute/s) Taxpayer received a statutory
notice of deficiency, but Taxpayer did not file a petition with the Tax
Court because Taxpayer believed that the notice of deficiency was invalid
because it was issued after expiration of the relevant statute of
limitations. 250 days after issuance of the statutory notice of deficiency,
the IRS began collection proceedings against Taxpayer. Taxpayer
immediately filed a petition with the Tax Court. Discuss whether the Tax
Court has jurisdiction.
Question P-21. (2 minute/s)
(a) Define collateral estoppel.
(b) A husband and wife were acquitted of tax evasion for 2 particular tax
years. In a subsequent civil proceeding in the Tax Court regarding the
same two years, a husband and wife attempt to collaterally estop the IRS
from litigating fraud and understatement of income issues for the two
years. Discuss whether the taxpayers may use collateral estoppel in this
Question P-22. (1 minute/s) Discuss the effect of the stipulation
of facts between parties on the burden of proof in a Tax Court case the
facts of which are fully stipulated.
Question P-23. (1 minute/s) Describe how a party to a Tax
Court case may have the Court take cognizance of certain property code
provisions of state law with respect to a property law issue that is
relevant to the Tax Court proceeding.
Question P-24. (2 minute/s) Taxpayer is an Arizona
Corporation. The IRS audited the taxpayer and sent a formal document
request by registered mail to the taxpayer's last known address. The
(a) the time and place for the production of the documents,
(b) a description of the documents being sought (all of taxpayer's
accounting records relating to a foreign branch in Country X and which
records are located outside of the U.S. in Country X), and
(c) the consequences to the taxpayer for the failure to comply with the
request: the taxpayers would be prohibited from introducing in a civil
proceeding any foreign-based documentation covered by the request.
The taxpayer never sent the IRS any of the requested documents. The IRS
did receive a document entitled "Notice of Writ of Preliminary Injunction"
issued by a court of Country X. The document purported to enjoin
production of the records requested by the IRS because such production
would violate the criminal laws of Country X. Four months after issuance
of the document request, the IRS issues a statutory notice of deficiency.
The taxpayer thereafter properly petitions the Tax Court, and at trial
attempts to introduce into evidence the accounting records of the foreign
branch in Country X. The accounting records are relevant and material to
the issue before the Court. The IRS objects to admission of the evidence.
Briefly explain how the Tax Court should rule.
Question P-25. (1 minute/s) Define "hearsay" under the rules
of evidence in the Tax Court and give an example of hearsay evidence.
Question P-26. (2 minute/s) Explain whether legally seized
accounting ledgers, not prepared by the taxpayer, detailing various illegal
sales and purchases of drugs by the taxpayer are admissible into evidence
in the Tax Court.
Question P-27. (2 minute/s) The IRS issued to Taxpayer a
statutory notice of deficiency for year 1 income tax. Taxpayer properly
filed a petition with the Tax Court to place the year 1 income tax liability
before the Tax Court. After the petition was filed, an IRS special agent of
the Criminal Investigation Division issued an administrative summons to
Taxpayer requesting information directly related to the matters at issue
before the Court regarding Taxpayer's income tax liability for year 1.
Taxpayer sought a protective order from the Tax Court that the IRS not
use any information obtained from the summonses in the prosecution of the
cases pending in the Tax Court. Discuss whether the Tax Court should
issue such an order.
Question P-28. (2 minute/s) A petition was properly filed with
the Tax Court regarding the estate tax due with respect to the estate of A.
The issue as to the estate tax is the value of certain Y Corporation stock
owned by A at death. The primary asset of Y Corporation was stock of X
Corporation. The appraiser previously had been retained by X Corporation
and the estate of A's son (who predeceased A) to assist in valuing certain
stock of X Corporation owned by A's son. Neither A nor A's estate had
ever retained the services of the appraiser. The IRS then retained the
appraiser for purposes of determining the fair market value for federal
estate tax purposes of the Y Corporation stock owned by A. A's estate
submitted to the Court a motion in limine to prevent the IRS from
"consulting with, reviewing and/or introducing at trial any expert reports,
memoranda or oral testimony prepared by or on behalf of the appraiser."
A's estate seeks to disqualify the appraiser due to a conflict of interest
or a violation of a privileged and confidential relationship. How should the
Tax Court rule?
Question P-29. (2 minute/s) Under what circumstances may a
witness be excluded from the Tax Court courtroom during the testimony of
other witnesses, and what sanctions are available to the Court for
noncompliance by the witness.
Question P-30. (3 minute/s) Describe briefly the essential
elements of the small tax case procedure in the Tax Court.
Question P-31. (2 minute/s) An IRS notice of final partnership
administrative adjustment was mailed seven days after the mailing of the
commencement notice required by S 6223(a)(1). Discuss whether the
notice of final partnership administrative adjustment is valid.
Question P-32. (6 minute/s) Discuss the rules regarding the
award of litigation costs incurred by the petitioner in a Tax Court
proceeding that is commenced in 1990. Include in your answer a
description of the amount that may be paid as attorneys fees.
Question P-33. (2 minute/s) Counsel for the petitioners
executed and filed a petition with the Tax Court. Attached to the petition
was an IRS final notice of intention to levy for the petitioners' 1978
taxable year. No statutory notice of deficiency was issued to the
petitioners for 1978 because the tax assessed was reflected on their 1978
return, but it had not been paid. The IRS moved to dismiss for lack of
jurisdiction. The IRS further moved for an award of counsel fees under
Tax Court Rule 33(b), alleging that, in the filing of the petition and
subsequent documents, counsel for the petitioners unnecessarily delayed
the proceeding. Briefly discuss the circumstances under which the Tax
Court may order the payment of reasonable expenses, including counsel
fees, to the government.
Question P-34. (2 minute/s) Discuss whether and how counsel
may withdraw from representation in a case in which counsel has entered
an appearance before the Tax Court if the basis for withdrawal is the
failure of the client to pay agreed upon fees to the counsel.
Question P-35. (3 minute/s) Discuss the conflict of interest
rules applicable to counsel in the Tax Court.
Question P-36. (2 minute/s) Taxpayers submitted a motion to
the Tax Court to strike portions of the IRS reply brief which referenced
and quoted several books and articles in support of a certain method of
valuing corporate stock, the value of which was a Question before the Tax
Court. The books and articles were not relied upon or referred to by any
witness at trial or established as reliable authority by any witness.
Briefly discuss whether the Tax Court should grant the motion.
Question P-37. (2 minute/s) Counsel discovers after a Tax
Court trial that the testimony of a witness was incorrect with respect to
the dates of certain events. The trial transcript correctly recites the
testimony of the witness at the trial, but the witness states that the
trial testimony was incorrect. Discuss how the Tax Court would rule on a
motion to correct the transcript with respect to such errors.
Question P-38. (1 minute/s) Taxpayer failed to enter into
stipulations as ordered by the Tax Court and failed to appear at the time of
trial. The Court dismissed the case due to Taxpayer's failure to properly
prosecute, and damages were awarded to the United States and against
petitioners in the amount of $5, 000 pursuant to section 6673. Taxpayer
then filed a motion to vacate the judgment, raising only tax protector
arguments which the Tax Court has consistently rejected in the past.
Briefly discuss the risks associated with Taxpayer's motion to vacate.
Question P-39. (1 minute/s) Before trial in the Tax Court, only
one issue remains, the factual issue of the value of certain real property.
Neither party wants to participate in a full trial over the sole factual
issue of the land valuation, but between themselves the parties cannot settle
the dispute. Briefly discuss any alternatives the parties may have.
Question S-1. (4 minutes) T Corporation had 950,000 shares
outstanding, but the stock not actively traded in an established market.
After struggling financially for several years, T Corporation sought
additional financing through several bank loans. T Corporation previously
had borrowed from two individuals and a corporation, T Corporation's
three largest shareholders (none of whom was employed by T
Corporation). As a condition for obtaining the loans, the banks required
personal guarantees, indemnity agreements, and subordination agreements
from the two individuals and the corporation from whom T Corporation
previously had borrowed money. The three shareholders entered into the
guarantees and subordinations voluntarily and without the expectation of
consideration or payment from T Corporation. Several years later and in
recognition of the increased risks the shareholders had assumed under the
guarantees and subordinations, T Corporation distributed to the three
shareholders stock warrants to purchase T Corporation common stock. The
shareholders exercised their stock warrants two years later, just prior to C
Corporation's acquisition of all of the stock of T Corporation. Describe the
tax consequences to the three shareholders of T Corporation.
Substantive Tax Law
Question S-2. (3 minutes) Taxpayer, an accrual-basis
corporation, settled a patent infringement suit on January 1, 1990, by
agreeing to pay the claimant $1,250 each month for the rest of the
claimant's life. The agreement further obligated Taxpayer to make at least
48 monthly payments regardless of the date of death of the claimant
($60,000). As of December 31, 1990, the claimant was alive. Taxpayer
retained complete control over use of the funds required to satisfy the
obligation until such times as payments were made to the claimant. Briefly
discuss whether Taxpayer may deduct in 1990 any amount with respect to
the settlement agreement.
Question S-3. (4 minutes) X and Y are cash method, calendar
year taxpayers. On December 1, 1988, X delivered to Y 60 widgets to be
sold in Y's store. The terms of the sale were that payment was due within
30 days of delivery of the widgets. The following are alternative
(a) On December 31, 1988, Y offered to pay X in cash for the widgets, but
X declined and requested payment in January 1989. If Y made payment to
X in January 1989, when should X have reported the gross income from
the sale of the widgets?
(b) On December 27, 1988, X received as payment from Y a check from Y
that was dated December 24, 1988. If X cashed the check on January 4,
1989, when should X have reported the gross income?
(c) On December 27, 1988, X's bookkeeper, a full-time employee of X,
received as payment a check from Y that was dated December 24, 1988,
and which was payable to X. The bookkeeper left on a ski trip without
depositing the check and did not return until January 4, 1989, on which
date X received and cashed the check. When must X report the gross
(d) On December 27, 1988, X received from Y a promissory note of Y in
the amount of Y's indebtedness to X. The note was executed because Y
had no cash and was in severe financial difficulty. The note was
nonnegotiable, bore no interest, and was due in 180 days. During
December, January, February, and March, X attempted to negotiate the
promissory note, but no one would accept the note. On May 1, 1989, Y
made full payment on the note. When must X report the gross income?
Question S-4. (4 minutes) In May 1990, a residential rental
apartment building in Florida owned by Taxpayer is totally destroyed in a
hurricane. Taxpayer's adjusted gross income for 1990 is $800,000
(determined without regard to Sections 86, 135, and 219). The building
had a fair market value of $300,000 before the hurricane. Taxpayer's
adjusted basis in the building was $200,000. Taxpayer received no
insurance or other compensation regarding this loss. Taxpayer's rental
income from the property for 1990 prior to the hurricane was $25,000 and
his expenses for that period totalled $60,000. Taxpayer did not materially
participate in the management of the apartment building. Discuss whether
any deductions are available to Taxpayer for 1990.
Question S-5. (4 minutes) Determine whether the following
damage awards are excludable from the recipient's gross income and
briefly explain why (treat each part separately).
(a) As a result of the negligence of her surgeon, Taxpayer lost the use of
her right hand. A jury awarded her both compensatory and punitive
(b) In the presence of other employees, Taxpayer was accused by her
employer of embezzlement and was summarily fired. She filed suit for
injury suffered as the result of defamation, pleading for both compensatory
and punitive damages. Taxpayer was awarded a judgment for $500,000 in
compensatory damages and $450,000 in punitive damages. Taxpayer also
filed an action against the employer's insurance company, based on the
insurance company's defense of Taxpayer's suit against the employer. The
suit against the insurance company alleged knowledge of lack of a
meritorious defense to her first action and conspiracy on the part of the
insurance company to defame her so her testimony at trial would be less
credible. Taxpayer settled her suit against the insurance company. The
settlement agreement provided for a lump-sum payment of $525,000, with
$300,000 allocated to compensatory damages and $225,000 allocated to
(c) P suffered serious injuries when stuck by a truck while riding his
bicycle. P retained Attorney and, on Attorney's advice, settled the personal
injury claim for $160,000. P later sued Attorney for malpractice, alleging
that Attorney negligently persuaded P to accept an unreasonable settlement.
In the trial of the malpractice ease, the jury found Attorney negligent and
awarded damages to P of $610,000. P and Attorney appealed the
judgment, but the appeals court upheld the trial court decision. P
eventually received $690,000 ($610,000 of damages and $80,000
(d) Taxpayer was one of a group of tenants of an apartment building who
brought suit against their former landlord on allegations of fraud and to
retain their rights to their apartments after their apartment building was
converted to a condominium and the tenants were evicted. As part of a
settlement, and in exchange for the termination of his occupancy rights,
Taxpayer accepted a lump-sum cash payment from the landlord. Taxpayer
simultaneously executed a document that released and discharged the
landlord from all causes of action.
Question S-6. (4 minutes) Taxpayer, a chemist who had
achieved internationally recognized status as a leader in his field,
received a $10,000 cash award from his employer based on his record of
performance with the company over a period of 10 years. He was
nominated without his knowledge by his supervisor to be a recipient of the
award, the purpose of which was to honor technical employees with 10 or
more years of service. The employer's letter accompanying the cheek
stated that the employee's achievements generally constituted important
contributions to the work of his department and also specifically noted the
usefulness of the work performed by the taxpayer to the employer. Discuss
whether the award may be excluded from Taxpayer's income and explain
Question S-7. (3 minutes) Briefly discuss whether Taxpayer
recognizes gain on the following transactions and determine the amount of
gain to be recognized where appropriate.
To finance the development of a residential subdivision, Taxpayer
borrowed from Bank and executed a recourse promissory note to Bank that
was secured by a mortgage on the subdivision. Taxpayer later became
insolvent, defaulted on the debt, and negotiated a settlement agreement
with Bank. The agreement transferred the subdivision to Bank in complete
satisfaction of the debt. After the transaction, Taxpayer was still insolvent.
When the subdivision was transferred to the bank, its fair market value was
$100,000, Taxpayer's adjusted basis was $80,000, and the amount due on
the debt was 120,000.
Question S-8. (4 minutes) Briefly explain whether Taxpayer
would be entitled to a deduction in the following situations:
(a) Taxpayer, was indicted by a federal grand jury under the Racketeer
Influenced and Corrupt Organizations Act for racketeering activities. If
Taxpayer were to be found guilty, all property and contractual rights
acquired by him with respect to the racketeering activities would be subject
to forfeiture. Taxpayer was acquitted by a jury and claimed a deduction for
the legal fees incurred in his defense on the ground that, because the
indictment sought the forfeiture of assets, the fees were incurred to
conserve and maintain income-producing property.
(b) Taxpayer, a corporation, obtained a loan to obtain working capital. The
promissory note included a conversion feature that allowed the holder of
the note to convert the note to 20% of the corporation's outstanding
common stock on the conversion date. Shortly before the due date for the
final payment, the note was sold to a hostile third party, who sought to
convert the note to stock. The corporation refused to convert the note and
the third party brought suit for specific performance. The taxpayer claimed
a deduction for legal fees incurred in connection with the litigation as an
ordinary and necessary business expense.
(c) Taxpayer, a corporation engaged in the printing business, made various
payments to the purchasing agents of all of its principal customers over a
five-year period to ensure the business patronage of those customers. Such
payments were extorted by the purchasing agents and were customary in
the printing industry. Taxpayer claimed deductions for the payments as
ordinary and necessary business expenses.
Question S-9. (3 minutes) Taxpayer, who lived in Michigan,
suffered from chronic coronary artery disease and associated lung problems
and required an oxygen tank to assist in breathing. Because the health
problems became more acute in the winter months, Taxpayer was advised
by a physician to spend the winter in a warmer climate. Acting on the
doctor's advice, the taxpayer travelled to Florida in October and remained
there for five months. The doctor did not specifically refer Taxpayer to
doctors in Florida or prescribe specific medical treatment. The taxpayer
lived in a travel trailer parked at a campground, and over the five-month
period paid a total of $1,500 in rental fees to the campground. Because of
Taxpayer's poor health, Taxpayer did not enjoy any significant element of
personal pleasure, recreation, or vacation during the winter months spent
in Florida. Taxpayer visited a Florida physician during the five months
spent in Florida for routine check-ups, treatment for incidental ailments,
and renewal of prescriptions for medications. Discuss whether Taxpayer is
entitled to a medical expense deduction for the $1,500 in rental fees as
lodging expenses during the winter months in Florida.
Question S-10. (4 minutes) Briefly discuss whether the taxpayer
is entitled to any deductions with respect to the offices described in the
following parts of this Question (treat each part separately).
(a) Taxpayer, a self-employed physician, works in three hospitals. Because
none of the hospitals provides Taxpayer with an office to manage his
practice, Taxpayer set up an office in Taxpayer's residence. Taxpayer
maintains patient records and does all of the billing and scheduling in this
office. Taxpayer also keeps a medical library in the office to keep current
with professional reading. The office is used regularly and exclusively for
these activities which are essential to Taxpayer's practice. No patients are
seen in the office, but Taxpayer normally spends approximately two to
three hours per day at the office, less than half the time spent at the
(b) Taxpayer is an actor. As an actor, Taxpayer performs as an independent
contractor, and has a room in his residence in which he trains and
rehearses. Taxpayer also is employed by an acting school as a teacher and
administrator and is provided by the employer with an adequate office at
the school. The theater employer does not require or expect Taxpayer to do
any work at home, but Taxpayer uses the residential office in connection
both with employment at the acting school and the work as an independent
Question S-11. (3 minutes) N Corporation wanted to hire
Taxpayer for a high-level executive position. Taxpayer was concerned
about the financial risk associated with relocation to Nowhereville, N
Corporation's business headquarters. To provide greater mobility in the
event of termination of employment with N Corporation, Taxpayer insisted
that N Corporation agree to purchase Taxpayer's home in Nowhereville if
employment were to be terminated. The employment agreement provided
for such a purchase at the property's fair market value. Two years later,
Taxpayer was terminated because of unsatisfactory performance and N
Corporation bought the home for $285,000, the fair market value of the
property. It took two more years for N Corporation to sell the property,
during which time the house was never rented nor considered as rental
property. On the sale of the house, N Corporation realized $186,000.
Discuss whether N Corporation's loss on the sale of the residence is
deductible as an ordinary and necessary business expense.
Question S-12. (3 minutes) Y Corporation offered to acquire all
of the outstanding stock of X Corporation. The board of directors of X
corporation determined it would be in X's long-term interest to shift
ownership of X stock to Y Corporation, and the board and officers of X
Corporation willingly negotiated with Y Corporation as to the proposed
transaction. As recommended by counsel (to assure compliance with
fiduciary duties to all shareholders), X engaged an investment banking firm
to value its stock, render a fairness opinion, and assist if the tender offer
became hostile. X Corporation incurred approximately $2,900,000 of
investment banking and legal fees and other expenses in connection with
the transaction. The transaction was completed, and X Corporation became
a wholly-owned subsidiary of Y Corporation. Discuss the deductibility of
the expenses incurred by X Corporation.
Question S-13. (4 minutes) Taxpayer properly was entitled to
carryover $150,000 of investment interest expense from 1988 to 1989. In
1989, Taxpayer incurred $25,000 of investment interest expense and
properly was allowed to deduct $15,000 under the investment interest
limitations. Taxpayer's 1989 taxable income was $8,000. Briefly discuss
the amount of Taxpayer's investment interest carryover to 1990.
Question S-14. (6 minutes) Discuss the amounts of the
following transfers that qualify as alimony (treat each part separately).
(a) Under the terms of a divorce decree, Taxpayer is obligated to make
annual alimony payments to former spouse, X, of $30,000, terminating on
the earlier of the expiration of six years or the death of X. X maintains
custody of their minor children. The decree provides that, at the death of
X, if there is then living a minor child of the marriage, Taxpayer will
make annual payments of $10,000 to a trust until the youngest child attains
the age of majority. The income and corpus of the trust are to be used for
the benefit of the minor child or children. At termination of the trust, any
remaining trust property is to be distributed to Taxpayer's children in equal
(b) Husband and Wife are divorced on July 1, 1985, when their children, L
(born July 15, 1970) and T (born September 23, 1972), are 14 and 12,
respectively. Pursuant to a divorce decree, Husband is to make alimony
payments to Wife of $2,000 per month. The payments are to be reduced to
$1,500 per month on January 1, 1991, and to $1,000 per month on
January 1, 1995.
(c) Husband and Wife are divorced in 1989. Husband and Wife enter into a
marital property and support agreement that is approved by the divorce
court and adopted as its order. The agreement requires Wife to make
alimony support payments in cash to Husband as follows:
Year Amount of Alimony
Assuming that all required payments are made by Wife, briefly discuss the
tax consequences to Wife and Husband in 1992.
Question S-15. (3 minutes) Husband owns real property having
a fair market value of $10,000 and an adjusted basis of $1,000. On
January 15, Husband borrows $5,000 from a bank, using the property as
security for the loan. Husband and Wife are divorced on June 1, and
pursuant to the divorce decree, Husband transfers title to the property to
Wife on July 1. Wife takes the property subject to the liability to pay the
$5,000 debt. In September, Wife sells the real property to a third party for
Briefly discuss the tax consequences to Wife with respect to the September
sale to the third party.
Question S-16. (4 minutes) Discuss the liability consequences
of each spouse who signs and files a joint income tax return, and explain
whether a spouse may avoid liability.
Question S-17. (4 minutes) X transfers investment real estate
with an adjusted basis of $10,000 and a fair market value of $11,000, plus
stock with an adjusted basis of $5,000 and fair market value of $2,000 for
investment real estate owned by Y with a fair market value of $13,000.
Determine the tax consequences of this transaction to X. X and Y are
Question S-18. (3 minutes) Taxpayer, the sole owner of all
outstanding stock of C Corporation, owns real property held for investment
purposes, Blackacre, with a basis of $40,000 and a fair market value of
$50,000. C Corporation owns real property, Whiteacre, with a basis of
$10,000 and a fair market value of $50,000. On January 10, 1990,
Taxpayer and C Corporation enter into an exchange of the two real
properties. On March 1, 1991, Taxpayer sells Whiteacre for $60,000.
Discuss the tax consequences of these transactions.
Question S-19. (7 minutes) Because Taxpayer was required by
his employer to relocate to Massachusetts, Taxpayer (age 45 years) sold his
New York residence, in which his basis was $40,000, for $100,000 in
1988. In 1988, Taxpayer purchased a residence in Massachusetts, which he
occupied as his principal residence, for $120,000. In 1989, his employer
relocated him to Virginia, where he purchased a residence for $90,000. In
1990, Taxpayer subsequently sold his home in Massachusetts for
$110,000. For purposes of this Question, assume that the conditions of
sec. 217(c) relating to moving expenses were satisfied with respect to the
sales of both the New York and Massachusetts residences.
(a) Determine the amount of gain realized and recognized by Taxpayer
upon the sale of the New York and Massachusetts residences.
(b) Determine the amount of Taxpayer's adjusted basis in the Virginia
Question S-20. (3 minutes) In 1989, G gave her granddaughter,
D, a diamond necklace with a fair market value of $5,000. G had
purchased the necklace in 1985 for $6,000. G paid no gift tax on the
What are the gain and loss consequences to D, if D sold the necklace in
Question S-21. (3 minutes) Fred, who is 58 years old, and
Ann, who is 35 years old, are married. Fred decides to sell the residence
in which he and Ann reside. Fred, who owns the home as his separate
property, sells the home for $175,000, and elects to exclude $125,000 of
gain under sec. 121. Ann joins in the election as required by sec. 121(c).
Two years later, Fred and Ann are divorced, and Ann marries Toby, age
55. Because Toby and Ann decide to spend the rest of their lives traveling,
Toby decides to sell his separate property residence. Explain whether Toby
qualifies within 121.
Question S-22. (6 minutes) In 1990, Taxpayer, a physician,
contributed $10,000 to X Corporation in exchange for 100 shares of
common stock, giving him a one-sixth ownership interest in the
corporation. Shortly after its incorporation, X Corporation timely filed an
election under sec. 1362(a). Because X Corporation was in need of
additional funds to purchase equipment, X Corporation negotiated a loan in
the amount of $250,000 from B Bank in 1990. B agreed to lend the money
to X Corporation only if all the shareholders agreed to guarantee the loan
and to assign insurance policies of $50,000 each on their lives. The
shareholders accepted B Banks's terms and conditions, and all six
shareholders individually signed a guarantee for the full amount of the
loan, which was further secured by a mortgage on the equipment
purchased with the loan proceeds. X Corporation timely made the principal
and interest payments on the loan.
In 1991, in a separate transaction, Taxpayer loaned X Corporation $5,000.
X Corporation properly reported a loss of $36,000 in 1990, its first year of
operation. In 1991, X Corporation properly reported a loss of $300,000.
(a) Briefly discuss the deductions available to Taxpayer, treating each year
(b) How would your answer change if Taxpayer made payments in 1990 of
$50,000 cash to the B Bank under the terms of the guarantee agreement.
Question S-23. (3 minutes) Briefly state the circumstances
under which an S corporation that elects S corporation status in 1990 and
which formerly was a C corporation will be subject to tax at the corporate
level on the distribution of property.
Question S-24. (3 minutes) Taxpayer owned all of the
outstanding shares of A Corporation. Taxpayer transferred all of the stock
of A Corporation to N Corporation, a widely held and publicly traded
corporation of which Taxpayer owned no stock prior to the transaction by
which N Corporation acquired control of A Corporation. Taxpayer
received from N Corporation 300,000 shares of common stock (less than
one percent of the outstanding common stock of N Corporation) and cash
of $3,250,000 in a transaction that qualified as a reorganization under sec.
368(a)(1). Discuss the tax consequences to Taxpayer.
Question S-25. (6 minutes) Discuss the tax consequences of the
following transactions to A, B, and the partnership.
(a) Upon the formation of a partnership on November 1, 1989, A
contributed land with a fair market value of $100,000 and a basis of
$30,000 for his one-half interest, and B contributed $100,000 in cash for
her one-half interest. A and B now agree that more cash is needed to
purchase a larger inventory. Because B is in a lower marginal tax bracket
than is A, the partnership makes a nonliquidating distribution of the land to
B. B plans to sell the land and contribute the proceeds, net of tax, to the
partnership. At the time of the distribution to B, the fair market value of
the land is $150,000. On the day before the distribution, A's basis in A's
partnership interest was $80, 000 and B's basis in B's partnership interest
was $150,000. The partnership's basis in the land was $30,000.
(b) Assume the same facts as in Question (a), except the fair market value
of the land is $70,000 at the time of the distribution to B.
Question S-26. (4 minutes) Discuss the effect under sec. 2032A
of the transactions described below.
(a) D died in 1989. D devised real property being used as a farm to her
son, S. D's estate qualified for and properly elected special use valuation
under S 2032A. At the time of D's death, the farm was operated by G,
who was D's grandson and S's nephew, under a crop-share lease. D's
estate leased the farm to G for calendar year 1990 under a fixed amount
cash rental agreement. During calendar year 1991, S operated the farm. In
December 1991, S entered into a fixed amount cash rental agreement with
G for four years under which G was to lease the land and conduct farming
(b) Assume the same facts as in (a), except that D devises the farm to her
husband, H, who immediately enters into a fixed amount cash rental
agreement with G for four years under which G was to lease the land and
conduct farming operations.
Question S-27. (4 minutes) Decedent dies in 1989. Discuss
whether bequests pursuant to the following provisions in the decedent's
will qualify for the estate tax marital deduction (assuming any required
election is made).
(a) D's will includes a $100,000 bequest to D's son, S, if S survives D. If
S predeceases D, the bequest goes to D's wife, W, if she survives D. Both
S and W survive D. S makes a qualified disclaimer pursuant to sec. 2518
of one-half of his $100,000 bequest, and the property passes to W.
(b) D's will directs his executor to purchase for $100,000 a nonrefund life
annuity for his surviving spouse, W.
(c) D's will bequeaths $500,000 in trust. The trustee is required to
distribute all the trust income, at least annually, to the wife for life. The
trustee also is given the discretionary power to invade trust corpus for any
"emergency needs" of the surviving spouse and D's brother. Upon the
wife's death, any remaining trust property passes to D's brother.
(d) Decedent's will leaves real property, Blackacre, valued at $250,000, to
his surviving spouse, W, for her life. Under Decedent's will, W has the
exclusive and unrestricted right to use Blackacre as her personal residence
or to rent the property and receive the income. After W's death, Blackacre
passes to Decedent's son.
Question S-28. (3 minutes) M and W are married and are
citizens of Peru but permanent resident aliens of the United States. M dies
and bequeaths all of M's property (all of which is located in the U.S.) to
W. Explain whether and under what conditions the estate tax marital
deduction will be available to M's estate.
Question S-29. (4 minutes) After a one week illness, Taxpayer
died on February 2, 1989. Discuss whether the properties discussed below
should be included in Taxpayer's gross estate for federal estate tax
(a) On February 8, 1987, Taxpayer established an irrevocable inter vivos
trust, naming a bank as trustee. Under the terms of the trust, the trustee
was authorized, but not required, to invest the trust principal in life
insurance policies. The trustee purchased an insurance policy on
Taxpayer's life on April 1, 1987. Taxpayer made cash contributions to the
trust on February 8, 1987, and periodically thereafter, a portion of which
contributions were used by the trustee to pay the periodic premium
obligations of the trust on the insurance policy.
(b) Taxpayer created an inter vivos trust and named an independent bank as
the trustee. The trust instrument authorized (but did not require) the trustee
to make discretionary distributions of income and principal to Taxpayer's
children. The trust was to terminate when there was no living child of the
taxpayer who was less than the age of 21 years. The trust instrument
reserved to Taxpayer the right to remove and replace the trustee with any
individual or corporation. Taxpayer dies without having exercised the right
to remove and replace the trustee.
Question S-30. (4 minutes) X and S were married recently, and
because each had a prior marriage with children, they executed an
antenuptial agreement. The antenuptial agreement created a trust ("Trust
1") for the benefit of S if she survived X. The trust was required to
distribute income to S until S's death or remarriage. Upon S's death or
remarriage, the corpus of Trust 1 poured over to Trust 2, which was the
residuary beneficiary of X's estate.
The principal asset of X's estate was stock of Z Corporation. X died and
X's estate had only $20,000 in liquid assets to pay Federal estate taxes of
$205,000. X's executor borrowed $205,000 to pay the estate tax. With the
approval of the Probate Court administering X's estate, the executor
borrowed from G Corporation, a closely held corporation controlled by
X's family, rather than selling stock held by Decedent's trust. The note
was unsecured and provided that interest and principal were due in a single
payment at maturity 15 years later, which was the life expectancy of S at
the time of X's death. Prepayment of both principal and interest was
prohibited. The interest rate on the loan from G Corporation was 15% per
year, the prime rate of interest on that date.
Discuss whether the interest expense of the loan is a deductible
Question S-31. (4 minutes) In 1980, Taxpayer and Spouse,
residents of Illinois, acquire Blackacre, real property, as joint tenants
with the right of survivorship. Taxpayer and Spouse contributed equally
from their separate properties to the purchase price of Blackacre. On
January 1, 1990, Spouse dies. On June 15, 1990, Taxpayer renounces her
survivorship interest in Blackacre, and the survivorship interest passes to
Taxpayer's child. Discuss whether Taxpayer has made a taxable gift as to
Question S-32. (7 minutes) Decedent's will created a trust
funded with assets from Decedent's estate. The trust instrument requires
that all the income of the trust be distributed currently to W during her
lifetime. Capital gains are allocable to corpus, and all expenses of the
trust are chargeable against corpus. The will requires that a reserve against
trust income be created in amount equal to the annual depreciation
deduction for federal income tax purposes. During 1990, the trust has the
following items of income and expense:
a. Rental income from real property . . . . $60,000
b. Taxable interest income . . . . . . . . . 30,000
c. Tax exempt interest income . . . . . . . . 10,000
2. Expenses and charges
a. I.R.C. sec. 162 business expenses
(maintenance) . . . . . . . . . . . . . . 20,000
b. I.R.C. sec. 168 depreciation deduction . . . 40,000
c. I.R.C. sec. 165 casualty loss to rental
realty . . . . . . . . . . . . . . . . . . 10,000
(The $10,000 loss to the property is
attributable to principal (not income)
under local law.)
Determine the amount of:
(a) the distributable net income of the trust;
(b) the trust's distribution deduction; and
(c) the taxable income of the trust.
Question S-33. (6 minutes) Explain in general terms the
operation of the "throwback" rules of sections 665-667 (ignoring the
multiple trust penalty of sec. 667(c)).
Question S-34. (4 minutes) X gave real property with a fair
market value of $50,000 to X's father on January 1, 1990. No gift tax was
payable on the transfer. The adjusted basis of the property to X was
$10,000. Six months later, the father died of a heart attack when the
property has a fair market value of $75,000. Under the terms of the
father's will, the real property is specifically devised to X. The estate has
distributable net income during the estate's taxable year that includes the
date of the distribution of the real property to X. What income, if any,
does X realize at the time of the distribution of the property, and what is
X's adjusted basis in the property?
Question S-35. (3 minutes) Taxpayer is a certified public
accountant who failed to file income tax returns for years 1 to 7 until after
an IRS Special Agent contacted Taxpayer in year 10 about the unfiled
returns. The accountant then filed proper returns. Discuss the applicability
to Taxpayer of the substantial underpayment of income tax penalty as to
the late-filed returns, assuming that all years are after 1990.
Question S-36. (7 minutes) During taxable year 1, $10,000 was
withheld from the wages of Taxpayer who also makes estimated tax
payments of $3,000, but Taxpayer fails to file the required income tax
return on or before the due date of April 15, year 2. The total amount of
tax required to be shown on the return for year 1 is $15,000. The
delinquency in filing continues until May 25, year 2, at which time
Taxpayer files the required return showing a tax of $15,000 and pays
$1,500 of the $2,000 tax due. The delinquency in payment for the
remaining $500 continues until July 30, year 2. Discuss and quantify the
additions to tax that will apply to Taxpayer.
Question S-37. (3 minutes) Discuss whether a taxpayer can
avoid a sec. 6651(a)(1) addition to tax if the taxpayer relied on a tax return
preparer to timely prepare the tax return, but the preparer did not prepare
the return prior to the due date.
Question S-38. (3 minutes) A return preparer mailed a tax
return to the IRS. The envelope contained the correct address for the IRS
Service Center to which the return was required to be filed. The return
preparer personally delivered the envelope to the local postmistress who
manually placed the correct first class postage on the envelope, manually
postmarked the envelope with that day's date, and deposited it in the
outgoing mail as first class postage. The envelope containing the return
was delivered by the return preparer to the postmistress on the due date of
the return. The postmistress knows the return preparer, and she remembers
processing the envelope to the IRS and the date on which the processing
occurred. The IRS claims never to have received the return. Discuss
whether the return was timely filed.
Question S-39. (6 minutes) In year 2, Taxpayer files an
individual income tax return for year 1 (the return for which was due after
1989). The return shows for year 1 taxable income of $U and income tax
liability of $V. An IRS audit of the taxpayer's return causes two
adjustments that increase Taxpayer's taxable income to $W and tax liability
to $X. The first adjustment, for which there was substantial authority and
which was not a tax shelter item, increased taxable income by $Y. The
second adjustment item increased taxable income in the amount of $Z, and
there was not substantial authority and not adequate disclosure as to the
second item. Discuss the applicability of the addition to tax for substantial
understatement of income tax.