CTP Tax Planning & Strategy 5 — Questions and Answers
Question 1: A taxpayer wishes to transfer a family business to their children at a discounted value for gift tax purposes. Which valuation technique legally justifies a discount on the transferred interest?
- Step-up in basis election
- Minority interest and lack of marketability discounts (Correct answer)
- FIFO inventory valuation
- Section 754 inside basis adjustment
Correct answer: Minority interest and lack of marketability discounts
Minority interest discounts (lack of control) and lack of marketability discounts can legally reduce the fair market value of transferred business interests for gift and estate tax purposes.
Question 2: Under the kiddie tax rules, unearned income above the threshold for a dependent child under age 19 is generally taxed at which rate?
- The child's own marginal rate
- A flat 10% rate
- The parents' marginal tax rate (Correct answer)
- Zero percent since the child is a dependent
Correct answer: The parents' marginal tax rate
The kiddie tax (Section 1(g)) taxes a child's net unearned income above the threshold at the parents' marginal tax rate to prevent income-shifting strategies.
Question 3: A taxpayer makes an election under Section 83(b) within 30 days of receiving restricted stock worth $10,000. Two years later the stock is worth $60,000. What is the tax outcome at vesting?
- $60,000 of ordinary income recognized at vesting
- $50,000 of ordinary income at vesting
- No income recognized at vesting; only capital gains later (Correct answer)
- $10,000 of ordinary income at vesting and $50,000 capital gain at sale
Correct answer: No income recognized at vesting; only capital gains later
A Section 83(b) election causes the taxpayer to recognize $10,000 of ordinary income at grant; subsequent appreciation is capital gain with the holding period starting at grant, so nothing is recognized at vesting.
Question 4: A client wants to maximize tax-deferred retirement savings as a sole proprietor with $200,000 net self-employment income. Which plan allows the highest contribution?
- SIMPLE IRA ($16,000 employee limit)
- SEP-IRA (up to 25% of net SE income)
- Solo 401(k) (employee + employer contributions up to annual limit) (Correct answer)
- Traditional IRA ($7,000 limit)
Correct answer: Solo 401(k) (employee + employer contributions up to annual limit)
A Solo 401(k) allows both an employee elective deferral (up to $23,000 in 2024, plus catch-up) AND an employer profit-sharing contribution (up to 25% of compensation), yielding the highest possible combined limit.
Question 5: Which of the following transactions qualifies as a like-kind exchange under Section 1031 after the Tax Cuts and Jobs Act of 2017?
- Exchange of business equipment for similar equipment
- Exchange of rental real estate for commercial real estate (Correct answer)
- Exchange of corporate stock for real property
- Exchange of partnership interests for real estate
Correct answer: Exchange of rental real estate for commercial real estate
After TCJA, Section 1031 like-kind exchanges are limited to real property only; personal property (equipment, vehicles, artwork) and intangibles no longer qualify.
Question 6: A taxpayer has $30,000 of passive activity losses from a limited partnership. In the current year the partnership generates $10,000 of passive income. What is deductible?
- $30,000 — all suspended losses are released
- $0 — passive losses can never offset passive income
- $10,000 — passive losses offset passive income dollar-for-dollar (Correct answer)
- $3,000 — subject to the capital loss limitation
Correct answer: $10,000 — passive losses offset passive income dollar-for-dollar
Passive losses can offset passive income from any source; the taxpayer deducts $10,000 of the suspended $30,000 loss against current passive income, leaving $20,000 suspended.
Question 7: A taxpayer sells their principal residence after living in it for 2 of the past 5 years (filing jointly). How much gain can be excluded from income?
- $250,000
- $500,000 (Correct answer)
- $1,000,000
- $750,000
Correct answer: $500,000
Under Section 121, married filing jointly taxpayers who meet the ownership and use tests can exclude up to $500,000 of gain from the sale of their primary residence.
CTP Tax Planning & Strategy 5
A taxpayer wishes to transfer a family business to their children at a discounted value for gift tax purposes.
Which valuation technique legally justifies a discount on the transferred interest?