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Estate Taxes Example Problems

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1. Hershel Barker was the president and majority shareholder in Bulldog Inc. He was a cash-basis taxpayer who reported his income on a calendar-year basis. On March 1,2009, Hershel was killed in a skiing accident. The estate has elected to report its income on a calendar-year basis.

Required: Give the tax consequences for the parties involved in the following situations:

a. Dividends of $10,000 had been declared by Bulldog Inc. on February 3,2009, payable March 4, 2009, to shareholders of record on February 17, 2009. Hershel's executor received the dividends.

b. What if the record date was March 10, 2009?

2. John Jefferson dies on November 10, 2009. John is on the cash basis of accounting for tax purposes. On November 29, 2009, a $4,000 paycheck covering the period November 1-November 8, 2009, is mailed to John's home. Who recognizes this paycheck as income? Would your answer to this question change if John was on the accrual basis of accounting at the date of his death?

3. Jane Jaffe dies on October 12, 2009. On the date of death, Jane has a bank account that pays interest on a quarterly basis. On December 31, 2009, $3,000 of interest income is credited to the bank account.

a. If Jane was on the cash basis of accounting at the date of her death, is any of the income included on Jane's final income tax return?

b. Would your answer to (a) change if Jane was on the accrual basis of accounting at the date of her death?

Solution Preview

Question 1A
In this situation, the dividends were declared prior to death, but paid after the death of Hershel Barker. Hence, are considered part of the gross estate and thus are included under the alternate valuation method.

Question 1B
In this case, the dividends were declared for ownership at a record ...

Solution Summary

This solution provides assistance with answering each of the questions involving estate taxes.