CPA Regulation (REG) : Taxation of Gifts

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

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Example Question #1 : Taxable Gifts

Which of the following payments requires the filing of a gift tax return?

Possible Answers:

$20,000 cash to a friend.

$20,000 tuition payment to XYZ College for a friend.

$20,000 medical payment to a doctor for a friend.

$20,000 to a political organization.

Correct answer:

$20,000 cash to a friend.

Explanation:

Payments made on another’s behalf paid directly to a health care provider for medical care or to an educational institution are not considered gifts for tax purposes. Additionally, the contribution to the political organization, while non-deductible for tax purposes, does not qualify as a gift (though there are limitations on amounts that may be contributed). Only the cash payment to the individual would require the filing of a gift tax return.

Example Question #2 : Taxable Gifts

On July 1, Year 11, Vega made a transfer by gift in an amount sufficient to require the filing of a gift tax return. Vega was still alive in Year 12. If Vega did not request an extension of time for filing the Year 11 gift tax return, the due date for filing was:

Possible Answers:

March 15, Year 12

April 15, Year 12

June 15, Year 12

June 30, Year 12

Correct answer:

April 15, Year 12

Explanation:

The gift tax return date is the same date as individual tax returns, April 15 of the subsequent year of the transfer.  

Example Question #3 : Taxable Gifts

Parents lend $2,000,000 to their child to start a business. The loan is interest free and is payable on demand. The imputed interest is subject to:

Possible Answers:

The gift tax each year the loan is outstanding.

The generation-skipping transfer tax, but not the gift tax.

An excise tax.

The gift tax only in the year the parents lend the money.

Correct answer:

The gift tax each year the loan is outstanding.

Explanation:

In this instance, the parents gave an advantageous loan to their child, the sort of which they would not give to a third party at arm’s length. As a result, the “lost” interest income (had they made a loan to another party at arm’s length) each year is treated the same as a gift. 

Example Question #4 : Taxable Gifts

Assuming tax law in effect during 2019, what amount of a decedent’s taxable estate is effectively tax free if the maximum applicable estate and gift tax credit is taken?

Possible Answers:

$0

$15,000

$11,400,000

$4,500,000

Correct answer:

$4,500,000

Explanation:

The max amount that can be transferred pursuant to a death tax free is $11,400,000.

Example Question #5 : Taxable Gifts

Of the following, which is a valid deduction from a decedent’s gross estate?

Possible Answers:

Income tax paid on income earned and received after the decedent’s death

Unified credit

Expenses of administering and settling the estate

Federal estate tax

Correct answer:

Expenses of administering and settling the estate

Explanation:

Expenses of administering and settling the estate are valid deductions from a decedent’s gross estate.

Example Question #6 : Taxable Gifts

Of the following, which transfer of money would require filing a full gift tax return?

Possible Answers:

Direct medical payment to a medical facility for a family member

Contribution to a political group

Payment of $30,000 cash to a friend

College tuition payment directly to the university

Correct answer:

Payment of $30,000 cash to a friend

Explanation:

As of 2020, the exclusion amount for a gift tax is $15,000. This means that funds in excess of $15,000 not excluded, such as a medical payment or tuition, must have a return filed for them.

Example Question #1 : Basis Of Assets Received By Gift Or Inheritance

Parent gave securities with an adjusted basis of $10,000 and fair market value of $9,000 to a child. Later the child sold the securities for $7,000. What is the child’s basis for the securities sold?

Possible Answers:

$0

$9,000

$7,000

$10,000

Correct answer:

$9,000

Explanation:

The general rule with gifts is that the donor’s basis rolls over to the recipient. The exception, however, is when FMV at the time of transfer is lower than the donor’s basis and the recipient sells the assets at a price lower than the FMV at the time of transfer. In this case, the recipient’s basis in the sold stock was the FMV at the time of the gift.

Example Question #2 : Basis Of Assets Received By Gift Or Inheritance

Ann purchased 100 shares of stock for $50 per share. Ten years later, Ann died on February 1 and bequeathed the 100 shares of stock to a relative, Blake, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Blake gave 100 shares of the stock to another of Ann’s relatives, Greg, on June 1 that same year, when the market value of the stock was $150 per share. What was Greg’s basis in the 100 shares of stock when acquired on June 1?

Possible Answers:

$5,100

$15,000

$10,000

$5,000

Correct answer:

$5,000

Explanation:

In an inheritance, unless an alternative valuation date is selected the beneficiary’s basis in the received property is the FMV at the time of the donor’s death (here, 100 stocks at $100 per share, or $10,000). At the split, the basis remained the same, but the value and number of stocks changed (now 200 stocks at $50, still $10,000 total). In a gift, typically the recipient’s basis is that of the donor’s, which means that Greg received 100 stocks with a basis of $50 per share, or a total basis of $5,000.

Example Question #3 : Basis Of Assets Received By Gift Or Inheritance

On February 1, Year 3, Howard learned that he was bequeathed 500 shares of common stock under his mother’s will. Howard’s mother had paid $2,500 for the stock 10 years ago. Fair market value of the stock on February 1, Year 3, the date of his mother’s death, was $4,000 and had increased to $5,000 six months later. The executor of the estate elected the alternative valuation date for estate tax purposes. Howard sold the stock for $4,500 on June 1, Year 3, the date that the executor distributed the stock to him. How much income should Howard include in his Year 3 individual income tax return for the inheritance of the 500 shares of stock that he received from his mother’s estate?

Possible Answers:

$5,500

$2,500

$0

$4,000

Correct answer:

$0

Explanation:

Gifts, whether from a living or deceased donor, are not taxable to the beneficiary, on the donor or the donor’s estate. In this case, Howard would only report a gain or loss for income tax purposes if he had sold the stock at a different value than the stock’s value on the alternative valuation date.

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