ACCT 51466046 Estate and Gift Taxation Planning Homework 1 3

ACCT 5146/6046 Estate and Gift Taxation Planning

Homework 1

(30 points)

Due 01/29/2018 at the end of Class

Name: _______________________________

Homer Sapp is single and works for the IRS in Cincinnati, OH. Homer lives in Ohio in a home given to him by his Aunt Patty Cake.   The warranty deed for the property contains the following language: “Patty Cake grants 742 Evergreen Terrace to Homer Sapp in fee simple absolute.” Patty cake bought the home for $100,000. When she gave the home to Homer it was valued at $200,000. Currently, the FMV of the home is $300,000. Homer also has a joint checking account with his son Bart Sapp with a balance in that account of $150,000.

Marge Poore works for Proctor and Gamble, in Cincinnati, OH. She divorced her husband Ned last year and as part of the property settlement, she was able to keep the house as the sole owner where she lives with her daughter Lisa. Marge and her ex-husband bought the house for $120,000. About three months ago, her neighbor Moe told her: “you know, now that you are single again, you should really think about marrying me because when you die the State of Ohio will take your house in probate and sell it off to satisfy your creditors!” He then said, “If you marry me I can take the house and I promise to care for Lisa so she doesn’t have to live on the street.” This idea made Marge so sick that the next day she had her lawyer change the deed on the house to state: “Marge Poore and Lisa Poore as joint tenants with right of survivorship.” When Marge changed the deed the value of the house was $328,000.

Depressed by her dating prospects, Marge decides to go to “Singles Night” at Jack’s Casino. There she meets Homer and after a few drinks decides to marry him. Shortly after the wedding, Homer Sapp and Marge Poore-Sapp decide that Marge will sell her house and the couple will live in Homer’s house. Lisa Poore objects to her mother’s marriage and refuses to let her sell the house. Also, Homer and Marge set up a joint savings account to save their earnings to purchase a vintage 1986 Plymouth Junkerolla jointly for $100,000. After six months of marriage they have enough money to buy the car.

A year after they are married Homer gets a job at a power plant in California where they buy a house for $300,000 solely from the proceeds of selling Homer’s home in Ohio. A week after starting his job a coworker named Waylon sees Homer’s potential and, in a jealous rage, murders Homer in cold blood. Homer’s will states that Marge will receive the house, his portion of the joint checking account with his son Bart and the car.

Questions

If anyone has to pay gift tax for Aunt Patty’s gift of the house to Homer who will have pay the gift tax? (1 point)

What type of property interest does Homer take in the house he received from Aunt Patty? (1 point)

What is Homer’s tax basis in the house he received from Aunt Patty? (1 point)

What is Marge’s tax basis in the home she received as a part of the property settlement? (1 point)

Were there gift tax consequences for Marge when changed the deed to include Lisa? If so, what is the amount of the taxable gift (3 points)

If Marge were to die right after she changed the deed and before she met Homer at Jack’s Casino how much of the house would be included in her gross estate? (3 points)

Can Lisa stop her mother from selling the house her mother received as part of property settlement? If yes, why yes? If no, why no? (2 points)

When Homer and Marge move to California (a quasi-community property state) will the house they buy in California be considered community property? If yes, why yes? If no, why no? (3 points)

Will the car they bought in Ohio be considered community property in California (a quasi-community property state)? If yes, why yes? If no, why no? (3 points)

How much of the joint checking account Homer had with Bart will Marge receive after Homer’s death? (2 points)

Does the car have to go through probate in California? If yes, why yes? If no, why no? (2 points)

If the car is valued at $200,000 at the time Homer’s death, what amount of the car will be included in Homer’s gross estate? (2 points)

What is Marge’s tax basis in the car after Homers death? (3 points)

Assume now that Homer and Marge still lived in Ohio (a common law state), what would Marge’s tax basis in the car be after Homer’s death in Ohio? (3 points)

Solution

1) Who has to pay Gift Tax on Aunt Patty\'s house gift to Homer?

Ans. - According to Federal Tax Laws the person who makes the gift is the on who is responsible for paying any gift tax that may be due and reporting the gift to IRS on a gift tax return- IRS Form 709.

However, for the recipient there won\'t be any immidiate tax consequence since the gift won\'t be included as part of the recipient\'s taxable income. But the recipient may incur capital gains tax when the gifted property is later sold because of the income tax basis that the recipient will receive in the gifted property.

Thus initially the gift tax will be paid by Aunt Patty when she gifts the house to Homer and when Homer sells the house as shifts to California, he will have to pay Capital Gain Tax.

2)What type of property interest does Homer take in the house he received from Aunt Patty?

Ans.- When Aunt Patty gifted Homer the house, the warranty deed read as follows - \"Patty Cake grants 742 Evergreen Terrace to Homer Sapp in fee simple absolute\". Fee simple absolute is an estate in land, a form of freehold ownership. It is a way that real estate may be owned in common law countries, and is the highest possible ownership interest that can be held in real property.

Thus Homer enjoys highest possible ownership interest that can be held in that property.

3)What is Homer’s tax basis in the house he received from Aunt Patty?

Ans.- As per U.S. federal tax law, the tax basis of an asset is generally its cost basis. Determining such cost may require allocations where multiple assets are acquired together. Tax basis may be reduced by allowances for depreciation. Such reducedbasis is referred to as the adjusted tax basis.

Therefore, the tax basis of Homer in the house he received from Aunt Patty if $300,000.

4) What is Marge’s tax basis in the home she received as a part of the property settlement?

Ans.- As per U.S. federal tax law, the tax basis of an asset is generally its cost basis. Determining such cost may require allocations where multiple assets are acquired together. Tax basis may be reduced by allowances for depreciation. Such reducedbasis is referred to as the adjusted tax basis.

Therefore, the current tax basis of Marge on the house she received as property settlement is $328,000.