06 Jul Tax Accounting Questions
1. Under a current proposal in Congress is the elimination of the estate tax while retaining the gift tax rules. Proponents of the estate tax says it allows the wealthy to create multi-generational wealth which does not benefit the country economically. They also argue that it creates family empires. Opponents of the estate tax claim that paying the estate tax causes many families to have to sell family businesses in order to pay the estate tax and that in most cases taxes have already been paid on the accumulated wealth that is being passed on. Describe your position on the estate tax and why it should be maintained, increased, decreased or eliminated according to your beliefs.
2. Before her death in 2009, Lucy entered into the following transactions:
a. In 2000, Lucy borrowed $600,000 from her brother, Irwin, so that Lucy could start a business. The loan was on open account, and no interest or due date was provided for. Under applicable state law, collection on the loan was barred by the statute of limitations before Lucy died. Because the family thought that Irwin should recover his funds, the executor of Lucy’s estate paid him $600,000.
b. In 2007, she borrowed $300,000 from a bank and promptly loaned that sum to her controlled corporation. The executor of Lucy’s estate prepaid the bank loan, but never attempted to collect the amount due Lucy from the corporation.
c. In 2008, Lucy promised her sister, Ida, a bequest of $500,000 if Ida would move in with her and care for her during an illness (which eventually proved to be terminal). Lucy never kept her promise, as her will was silent on any bequest to Ida. After Lucy’s death, Ida sued the estate and eventually recovered $600,000 for breach of contract.
d. One of the assets in Lucy’s estate was a palatial residence that passed to George under a specific provision of the will. George did not want the residence, preferring cash instead. Per George’s instructions, the residence was sold. Expenses incurred in connection with the sale were claimed as section 2053 expenses on Form 706 filed by Lucy’s estate.
e. Before her death, Lucy incurred and paid certain medical expenses but did not have the opportunity to file a claim for partial reimbursement from her insurance company. After her death, the claim was filed by Lucy’s executor, and the reimbursement was paid to the estate.
Discuss the estate and income tax ramifications of each of these transactions.
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