Taxation 25
Income of Estates and Trusts
Solutions to Tax Research Problems
25-33 Reg. 1.643(a)-3(a) provides the general rule that capital gains realized upon the sale of fiduciary assets are normally allocated to corpus and excludable from the distributable net income of the fiduciary. However, the regulation lists three situations in which capital gains may be included in DNI: 1. The gains are allocated to fiduciary income under the terms of the governing instrument or local law by the fiduciary on its books or by notice to the beneficiary; 2. The gains are allocated to corpus but actually distributed to beneficiaries during the taxable year; or 3. The gains are utilized (pursuant to the terms of the governing instrument or the practice followed by the fiduciary) in determining the amount that is distributed or required to be distributed. Situation 1 is clearly inapplicable, based upon the fact that the trust instrument described in the research problem specifies that capital gains realized upon the sale of trust assets are allocable to trust corpus. The applicability of Situation 2 is discussed in Revenue Ruling 68-392, 1968-2 C.B. 284. The ruling states that "this provision regarding the inclusion of capital gains in distributable net income applies only where there is a distribution required by the terms of the governing instrument upon the happening of a specified event." For example, if the trustee of a trust containing real property is directed to hold such property for 10 years and then sell it and distribute the proceeds to a beneficiary, the sale of the property is a specified event, and any capital gain realized would be included in DNI for the year of sale. [See Example (3), Reg. 1.643(a)-3(d).] Situation 3 requires that capital gains be included in DNI if they are utilized in determining the amount that is distributed to beneficiaries. Example (1), Reg. 1.643(a)-3(d) indicates that when a trustee follows a regular practice of distributing the exact net proceeds from the sale of the trust assets, the capital gains realized upon the sale will be included in DNI. Based upon the facts of the research problem, the trustee appears to have adopted a practice of routinely distributing capital gains to beneficiary M. As a result, the IRS certainly has an argument that Situation 3 is applicable and that the $25,000 capital gain should be included in the trust's DNI for the current year.
5-
25-1
25
Income Taxation of Estates and Trusts
Test Bank
True or False
1. There is no statutory period after which a decedent's estate must be terminated. 2. Both estates and trusts may pay any income tax due for a year with a timely filed return. 3. Decedent D, a calendar year taxpayer, died on October 18 of the current year. The estate of D also must use a calendar year for income tax purposes. 4. As a general rule, tax provisions that apply to the income taxation of individuals also apply to the income taxation of fiduciaries. 5. The standard deduction available to a fiduciary is the same amount available to a married taxpayer filing separately. 6. Since fiduciaries are generally only managing assets and not carrying on a business, their expenses are not deductible. 7. The Estate of X incurred administration expenses of $42,000. These expenses can be taken as an estate tax deduction to reduce X's taxable estate and can also be deducted for income tax purposes on the estate income tax return. 8. On February 9, 19X2 trustee T makes a $10,000 payment to a qualified charity out of the gross income of the Alpha trust, a calendar year taxpayer. T may elect to deduct the payment on Alpha's 19X1 or 19X2 income tax return. 9. If a trust incurs a net operating loss or a capital loss, the trust beneficiaries may deduct the losses under the "conduit" theory for their taxable year within which the trust year ends. 10. An executor may elect to include "income in respect of a decedent" either in the gross estate on the Federal estate tax return or in gross income on the fiduciary Federal income tax return.
25-3
25-4
Chapter 25
Income Taxation of Estates and Trusts
11.
Upon his death, individual T, a cash basis taxpayer, had an outstanding account receivable of $20,000 for services he had performed prior to death. Because of some uncertainty as to its collectability, this receivable was valued at $15,000 for estate tax purposes. The tax basis of this asset to T's estate is zero. A fiduciary can elect whether or not to recognize a gain for tax purposes on the distribution of appreciated property made in fulfillment of a pecuniary bequest to a beneficiary. If a fiduciary does not elect to recognize gain or loss on the distribution to a beneficiary of appreciated or depreciated property (determined as if the property had been sold at fair market value), the fiduciary's tax basis in the property carries over to the beneficiary. Taxable income not available for distribution to income beneficiaries may still be included in distributable net income. The categorization of a trust as "simple" or "complex" may vary from year to year. Because a simple trust by definition is a trust that must distribute all income currently to beneficiaries, a simple trust will never have an income tax liability. Under the terms of the governing trust instrument, the trustee of ABC trust is required to distribute all trust income annually to trust beneficiaries. In the current taxable year, the trust had taxable income of $100,000. However, because of an illness late in the year, the trustee failed to make any actual cash distributions to beneficiaries. The beneficiaries will report and pay tax on the $100,000 of current year trust income even though no actual distribution was made. Estate E has a fiscal year ending September 30 of the current year. On October 15 of the current year, the executor distributed $10,000 out of current year income to beneficiary Q, a calendar year taxpayer. Q will report the taxable portion of this distribution on his current year's tax return. In the current taxable year, trust beneficiary B received a distribution exceeding DNI. B will generally not pay tax on the distribution. Income accumulated in a trust for a child less than 19 is taxed at the parents' rates and not the trust's rates.
12.
13.
14.
15. 16.
17.
18.
19.
20.
Multiple Choice
21.
The trustee of the XYZ Trust has been selling off assets and purchasing others with the aim of establishing a major trucking business. Besides possibly breaching his fiduciary duty to prudently manage the trust assets, the trustee's action may cause the IRS to a. b. c. d. Characterize the trust as an association taxable as a corporation Impound the trust's assets Investigate the trustee's fitness to serve Both a. and c.
22.
Fiduciary accounting income is a. b. c. d. Determined by reference to the governing instrument (will or trust agreement) and applicable state law The taxable DNI not distributed to beneficiaries The trustee's fee for preparation of accounting reports Always inclusive of stock dividends
Test Bank
25-5
23.
F transfers $100,000 in trust to trustee T. Under the terms of the trust instrument, S (F's son) is to receive the income of the trust for his lifetime. Upon S's death, the corpus will be distributed to GC, S's daughter. The beneficiaries of this trust are a. b. c. d. S only S and GC T and S T, S, and GC
24.
For the current year, Trust J has the following receipts and expenses: Tax-exempt interest income Dividends from domestic, taxable corporations Long-term capital gain (allocable to corpus under state law) Trustee fee (equally allocable to income and corpus under the trust instrument) $12,000 15,000 5,000 (4,000)
Based on the above facts, what is the trust 's income for fiduciary accounting purposes? a. b. c. d. 25. a. b. c. d. 26. a. b. c. d. 27. $23,000 $25,000 $28,000 $32,000
To determine whether capital gains are allocable to corpus, the trustee should Consult the trust instrument. Look to applicable state law. Examine the tax consequences to the beneficiaries, and allocate to corpus only if tax results to beneficiaries are desirable. Both a. and b.
If the terms of a trust allocate one-third of the trustee's fee to corpus, which of the following is true? The provision is void--the corpus can never be invaded. The balance is charged against income. The one-third of the fee allocable to corpus is not deductible for income tax purposes. The trustee will have to wait until the corpus is distributed to the remaindermen to receive this portion of his fee.
Which of the following triggers the filing of Form 1041, the fiduciary income tax return? a. b. c. d. An estate with annual gross income of $430. A trust with annual gross income of $1,600. An estate with annual gross income of $500, and with a beneficiary who is an English citizen residing in London. Both b. and c.
28.
The amount of personal exemption available to a complex trust is a. b. c. d. $0 $100 $300 $600
29.
The amount of personal exemption available to a simple trust is a. b. c. d. $0 $100 $300 $600
25-6
Chapter 25
Income Taxation of Estates and Trusts
30.
In the current taxable year, Trust J has the following receipts and expenses: Tax-exempt interest income Taxable interest income Rent income Long-term capital gain allocable to corpus Trustee fee Rent expenses Based on these facts, the trust may deduct a. b. c. d. $2,000 trustee fee and $1,100 rent expense $1,800 trustee fee and $990 rent expense $1,600 trustee fee and $880 rent expense $1,600 trustee fee and $1,100 rent expense $5,000 12,000 8,000 25,000 2,000 1,100
31.
In the current taxable year, Trust R has the following receipts and expenses: Tax-exempt interest income Taxable interest income Rent income Long-term capital gain allocable to corpus Trustee fee Rent expense $15,000 7,000 23,000 15,000 9,200 12,000
During the current taxable year, the trustee made payments to charity totaling $3,000. The trust may claim a charitable contribution deduction of a. b. c. d. 32. $0 $2,000 $2,250 $3,000
The governing instrument for Trust S provides that the trustee will establish a reserve for depreciation of trust rental property of $10,000 per year. In the current year, Trust S's rental property generates a tax depreciation deduction of $18,000. During the current year, the trustee distributes 30 percent of S's DNI to beneficiaries. Based on these facts, Trust S may take a depreciation deduction of a. b. c. d. $0 $12,600 $15,600 $18,000
33.
Which of the following may a fiduciary not deduct? a. b. c. d. Net operating loss carryforwards Capital losses to the extent of capital gains Current losses from passive activities to the extent of current income from passive activities A casualty loss already claimed as a deduction on an estate tax return
34.
D, a country doctor, died suddenly. The doctor practiced as a sole proprietor using cash basis accounting. The decedent's final return reported cash basis income and expenses on Schedule C (Form 1040). D's former patients have continued to send checks in payment for services D performed. The landlord, phone company, and other creditors of his practice have sent their bills. The administrator of D's estate should a. b. c. d. Treat the checks as nontaxable gifts and the bills as voidable because of D's death Return the checks and bills to avoid burdening the decedent's estate with the possible tax consequences Include the checks as income upon receipt and deduct the bills as expenses when paid on the estate income tax return (Form 1041) File an amended tax return (Form 1040X) to recognize the income and deductions to D because the decedent's final return must use the accrual basis
Test Bank
25-7
35.
Distributions of trust income to trust beneficiaries most resembles a. b. c. d. The flow-through income to an S corporation shareholder The proportionate share of income received by a partner as a share of profits Gifts Both a. and b
36.
The executor of D's estate, in accordance with the specific instructions of the testator, must distribute 50 percent of the income produced by the estate to A. The estate recognized $60,000 income, and the executor distributed $25,000 and a diamond ring worth $5,000. The ring belonged to the estate and had not been bequeathed to anyone. As a result of this distribution, A should report taxable income of a. b. c. d. nothing--legacies and bequests are tax-free. $25,000 $30,000 $5,000
37.
During the current year, the Estate of W had taxable income of $11,000. During the year, the executor of the estate distributed an automobile that had been owned by decedent W to W's daughter, D. The automobile was a specific bequest to D. The automobile had a basis to the estate of $10,000, and a fair market value at date of distribution of $14,000. Based on these facts, D has received an income distribution from the Estate of W of a. b. c. d. $0 $10,000 $11,000 $14,000
38.
Under the terms of Q's will, beneficiary X was to receive a cash (pecuniary) bequest of $25,000. X agreed to accept certain shares of corporate stock, FMV $25,000, out of the Estate of Q in satisfaction of this bequest. The basis of the shares to the Q Estate was $21,000, the value of the shares at the date of Q's death. Based on these facts, a. b. c. d. The Estate of Q will recognize a $4,000 gain, and X will have a $25,000 basis in the shares. The Estate of Q will recognize a $4,000 gain, and X will have a $21,000 basis in the shares. The Estate of Q will not recognize any gain, and X will have a $21,000 basis in the shares. The Estate of Q will not recognize any gain, and X will have a $25,000 basis in the shares.
39.
A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DNI) during its current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the remaining amount is made up of dividends. According to the trust instrument, the trustee may make discretionary distributions of trust income; during the current year $1,000 is distributed to beneficiary B. The taxable portion of this amount is a. b. c. d. $0 $808 $1,000 $708
40.
A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DNI) during its current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the remaining amount is made up of dividends. According to the trust instrument, the trustee may make discretionary distributions of trust income; during the current year $1,000 is distributed to beneficiary B. The distribution made by the trust entitles the trust to a deduction of a. b. c. d. $0 $808 $1,000 $708
41.
In the current taxable year, Trust MN had DNI of $50,000, $10,000 of which was nontaxable. During the year, Trustee T made a $15,000 cash distribution to beneficiary M and a $30,000 cash distribution to beneficiary N. (The trust instrument does not require that all trust income be distributed to beneficiaries.) Based on these facts, a. b. c. d. M should report taxable income of $15,000; N should report taxable income of $30,000. M should report taxable income of $15,000; N should report taxable income of $25,000. M should report taxable income of $16,667; N should report taxable income of $33,333. M should report taxable income of $12,000; N should report taxable income of $24,000.
25-8
Chapter 25
Income Taxation of Estates and Trusts
42.
Which of the following statements is not a characteristic of DNI (distributable net income)? a. b. c. d. DNI can be composed of both nontaxable and taxable amounts of income. Any trust taxable income allocable to corpus under state law is not included in DNI. In computing DNI, no deduction for a personal exemption is allowed. DNI is the amount of fiduciary accounting income that the trustee may distribute under the terms of the governing instrument.
43.
In the calculation of the distributable net income of a fiduciary, which of the following statements is true? a. b. c. d. A deduction for a personal exemption is allowed. Net tax-exempt income is excluded. A deduction for trustee fees allocable to corpus is allowed. A deduction for any net capital loss is allowed.
44.
A fiduciary is instructed by a trust instrument to distribute currently all trust income equally between two beneficiaries. Furthermore, the corpus of the trust is to be preserved intact for the remainderman. The instrument states that no charitable contributions are allowed from either income or principal. During the year, the trust's DNI was $23,000: $22,000 from rents and $1,000 from interest on a taxexempt debenture. Based on these facts, the trust is a(n) a. b. c. d. Simple trust Complex trust Grantor trust Income trust
45.
A fiduciary is instructed by a trust instrument to distribute currently all trust income equally between two beneficiaries. Furthermore, the corpus of the trust is to be preserved intact for the remainderman. The instrument states that no charitable contributions are allowed from either income or principal. During the year, the trust's DNI was $23,000: $22,000 from rents and $1,000 from interest on a taxexempt debenture. Compute the reportable income for one of the beneficiaries (B), and the trust's deduction for distributions made to the beneficiaries. a. b. c. d. $11,000 taxable to B; $22,000 deductible by trust $11,000 taxable to B; $23,000 deductible by trust $11,500 taxable to B; $22,000 deductible by trust $11,500 taxable to B; $23,000 deductible by trust A complex trust may have both "first-tier" and "second-tier" beneficiaries. A complex trust may not make any charitable contributions during the year. A complex trust that is not required to distribute all income currently may only claim a $100 personal exemption. A complex trust may make distributions of both trust income and corpus.
46.
Which of the following statements is not a characteristic of a complex trust? a. b. c. d.
47.
In the current taxable year, Trust XYZ had fully taxable DNI of $100,000. Under the terms of the trust instrument, the trustee was required to make a $60,000 income distribution to beneficiary X. In addition, the trustee made discretionary cash distributions in the current taxable year of $20,000 each to beneficiaries X, Y, and Z. Based on these facts, a. b. c. d. X should report taxable income of $66,667; Y and Z should each report taxable income of $16,667. X should report taxable income of $80,000; Y and Z should each report taxable income of $10,000. X should report taxable income of $73,333; Y and Z should each report taxable income of $13,333. All distributions are fully taxable to X, Y, and Z.
48.
A complex trust has $70,000 in DNI for the current year. One-tenth of the income is from tax-exempt bonds. Distributions to beneficiaries total $7,000 for the current year. The trust must report taxable DNI of a. b. c. d. $70,000 $63,000 $6,300 $56,700
Test Bank
25-9
49.
When allocating DNI among beneficiaries who have received distributions during the taxable year exceeding DNI, the tier one distributions represent a. b. c. d. Distributions other than those required to be paid currently Distributions of tax-exempt income only Distributions required to be paid currently Distributions of taxable income only
50.
During the current year, Trust S had the following receipts and expenses: Taxable interest Tax-exempt interest from municipal bonds Trustee fee $45,000 15,000 (2,000)
During the year, $43,500 was distributed to X, the sole income beneficiary. The trust instrument does not require that all trust income be distributed to X annually. Based on these facts, the 661(a) distribution deduction available to the trust is a. b. c. d. 51. $58,000 $43,500 $33,750 $32,625
Father created a testamentary simple trust for his two sons, A and B. Father's will clearly indicates that A and B should have an equal interest in both income and corpus but also allows the trustee considerable discretion to deal with any financial emergencies. A needs a kidney transplant and cannot afford the operation without larger distributions from the trust. B does not object and tells the trustee to "do what Dad would have wanted." If the trust's DNI was $50,000 for the current year (100% taxable) and A receives a cash distribution of $60,000, A's taxable income from the trust is a. b. c. d. $0 $25,000 $50,000 $60,000
25
Income Taxation of Estates and Trusts
Solutions to Test Bank
True or False
1. True. It may take several years to determine how the estate will be distributed. As long as reasonable progress is being made to settle the decedent's affairs, the IRS will continue to recognize the estate. (See p. 25-1.) 2. False. As a general rule, fiduciaries must make estimated tax payments in the same manner as individuals. [See p. 25-5 and 6654(l).] 3. False. An estate may elect its own taxable year, regardless of the taxable year of the decedent. The first taxable year of the estate starts the day after the decedent's death. (See p. 25-5.) 4. True. [See p. 25-5 and 641(b).] 5. False. A fiduciary is not entitled to a standard deduction. [See p. 25-6 and 63(c)(6)(D).] 6. False. Fiduciary expenses are normally deductible under 212, which permits the deduction of ordinary and necessary expenses incurred in the management, conservation, or maintenance of property held to produce income. (See p. 25-6.) 7. False. The executor must elect to take these expenses as deductions for either estate tax purposes or income tax purposes but not both. However, administration expenses that could be deducted for either estate tax or income tax can be allocated between the two returns to achieve maximum tax benefit. [See p. 25-8, 642(g), and Reg. 1.642(g)-2.] 8. True. This flexibility in the timing of the deduction is provided in 642(c)(1). [See p. 25-9 and Reg. 1.642(c)-1(b).] 9. False. Losses do not pass through to trust beneficiaries except in the year of termination. [See p. 25-10 and 642(d).] 10. False. There is no election as regards to income with respect to a decedent. The right to such income is included as an asset in the gross estate and is also recognized as taxable income when received by the fiduciary. [See pp. 25-11 and 25-12 and 691(a).]
25-11
25-12 Chapter 25
Income Taxation of Estates and Trusts
11. 12.
True. The receivable represents "income in respect of a decedent" and receives no basis step-up to fair market value at death. [See pp. 25-11 and 25-12 and 691(a) and 1014(c).] False. The appreciation of assets distributed in satisfaction of a pecuniary bequest must be recognized as gain by the fiduciary. The basis to the distributee will be the FMV of the distributed assets. [See Example 11, p. 25-14, and Reg. 1.661(a)-2(f)(1).] True. [See Example 10 and pp. 25-13 and 25-14 and 643(e)(1).] False. If the income is not available for distribution (e.g., capital gain allocated to the corpus), it is not part of the distributable net income. (See p. 25-15.) True. The conditions characterizing a trust as either simple or complex may vary every year. [See p. 25-15, 651(a), and Reg. 1.651(a)-1.] False. A simple trust will pay tax on any taxable income allocated to corpus and therefore not available for distribution to income beneficiaries. [See p. 25-16, 651(b), and Reg. 1.652(c)-4.] True. Taxability of trust income to the beneficiaries of a simple trust is not dependent on cash flow. [See p. 25-16 and 652(a).] False. Q will report the taxable portion of the distribution as income in the following year. This is his taxable year within which the fiscal year of the estate during which the distribution is made (October 1-September 30) ends. [See Example 21, p. 25-21, and 652(c) and 662(c).] True. The distribution represents income previously taxed. [See p. 25-17.] False. The kiddie tax does not apply to trusts. However, any investment income distributed to the child could be subject to the kiddie tax.
13. 14. 15. 16. 17. 18.
19. 20.
Multiple Choice
21. 22.
a. By conducting the trust as a profit-making enterprise, the trustee runs the risk of having IRS classify it as an association subject to corporate tax rates. (See pp. 25-2 and 25-3.) a. In many cases "fiduciary accounting income" is different from the concept of taxable income. The governing instrument and relevant state law--not the Internal Revenue Code--are used in its calculation. (See pp. 25-3 and 25-4.) b. S and GC. The trustee is not considered a beneficiary. However, both the recipient of an income interest (S) and a remainder interest (GC) are beneficiaries. (See p. 25-3.) b. $25,000. The fiduciary accounting income is computed as follows: Tax-exempt interest Dividends Trustee fee allocable to income $12,000 15,000 (2,000) $25,000
23. 24.
Note that the long-term capital gain and the amount of the trustee fee allocable to corpus are not included in the calculation. (See pp. 25-3 and 25-4.) 25. 26. d. The trust instrument should be consulted to determine if capital gains are allocable to corpus. If the instrument is silent on this point, state law may provide for their allocation to corpus. (See p. 25-3.) b. The terms of a trust may charge part of the trustee's fees to corpus and the remaining part to income. (See p. 25-3.)
Solutions to Test Bank
25-13
27. 28. 29.
d. b. c.
[See p. 25-3 and 6012(a)(3), (4), and (5).] (See p. 25-5.) The exemption is $300 for a trust that is required by the trust instrument to distribute all trust income currently. One definitional requirement under 651 for a simple trust is that the trust be required to distribute all income currently. [See p. 25-6 and 642(b).] A portion of the trustee fee must be allocated to fiduciary nontaxable income as follows: Tax-exempt income $5,000 $2;000 trustee fee $400 Total fiduciary income $25;000 all interest and rent Therefore, only $1,600 of the fee is deductible. The total amount of rent expense is deductible because it is directly attributable to taxable fiduciary income. [See Example 3, p. 25-7, and Reg. 1.652(b)3(b).]
30.
d.
31.
b.
A portion of the charitable contribution is considered paid out of fiduciary nontaxable income as follows: Tax-exempt income $15,000 $3;000 contribution $1,000 Total fiduciary income $45;000 all interest and rent Therefore, only $2,000 of the contribution is deductible. [See Example 4, p. 25-9, and Reg. 1.642(c)3(b).]
32.
c.
The allowable tax depreciation is allocated to the trust as follows: Tax depreciation Allocation for required trust reserve Percentage of DNI retained by the trust $18,000 (10,000) $8,000 70% $ 5,600
$10,000 plus $5,600 = $15,600 total depreciation allocated to the trust. [See Example 5, p. 25-9, and Reg. 1.167(h)-1.] 33. 34. 35. d. c. d. Section 642(g) prohibits the deduction by a fiduciary of any loss that has already been claimed as a deduction on an estate return. (See p. 25-10.) Income in respect of a decedent (IRD) and deductions in respect of a decedent (DRD) are items reportable on the estate income tax return (Form 1041). [See p. 25-11 and 691(a) and (b).] Income flows through the fiduciary to the beneficiary, retaining its original character as taxable income. Similarly, S corporations and partnerships act as conduits to shareholders and partners for distributing taxable income. (See p. 25-13.) Income produced by the estate's assets retains its character when it flows through to the beneficiary. The $5,000 ring is distributed to A as part of her share in the income of the estate, and therefore is characterized as income to A. (See Example 9 on pp. 25-13 and 25-19.) The distribution of the car does not represent an income distribution. [See Example 9, p. 25-13, and 663(a)(1).]
36.
c.
37.
a.
25-14 Chapter 25
Income Taxation of Estates and Trusts
38.
a. Because the property distribution is in satisfaction of a pecuniary bequest, the trust must take the gain into income, and the recipient will have a basis equal to FMV of the property. [See Example 11, p. 25-14, and Reg. 1.661(a)-2(f).] b. $1,000 distribution $10,500 taxable DNI $808 $13,000 total DNI
39.
(See Example 12 and p. 25-15.)
40.
b. The central concept of Subchapter J is that income recognized by a fiduciary will be taxed either to the fiduciary itself or to the beneficiaries of the fiduciary. Any amount taxable to the beneficiaries is deductible by the fiduciary. (See p. 25-13.) d. Taxable DNI $40,000 $80% $13,000 total DNI M's distribution $15,000 80% = $12; 000 M's distribution $15,000 80% = $12; 000 [See Examples 12, 15 and 16, p. 25-15 and Reg. 1.662(b)-1.]
41.
42. 43. 44.
d. If tax deductible trust expenses are allocable to corpus under the governing trust instrument, DNI will be less than fiduciary accounting income. (See pp. 25-13 and 25-14.) c. For purposes of calculating fiduciary DNI, a deduction is always allowed for fees allocable to the corpus. (See pp. 25-15 and 25-16 and 643 for the definition of distributable net income.)
a. This trust meets the three requirements of 651 for a simple trust: (1) required to distribute all trust income currently, (2) no current deductions for charitable contributions, and (3) no current distributions from corpus. (See p. 25-16.) a. Total taxable DNI Taxable DNI to B $22,000 11,000
45.
The trust's deduction is $22,000. (See Example 12 and pp. 25-14 and 25-15.) 46. 47. b. A complex trust may make charitable contributions. [See p. 25-16 and 651(a)(2).] c. Taxable DNI First-tier allocation DNI allocable pro rata to second-tier distributions $100,000 (60,000) $ 40,000
$20,000 X's second-tier distribution $40,000 $13; 333 $60,000 all second-tier distributions Total taxable DNI allocable to X is $60,000 + $13,333 = $73; 333 [See Example 17, p. 25-18, and Reg. 1.662(a)-3(d).] 48. d. To figure the trust's taxable DNI, it is necessary to determine the beneficiary's share of taxable DNI. B received $7,000, but only $6,300 is taxable. $7,000 $63,000 taxable DNI $6,300 $70,000 DNI
The trust is allowed a $6,300 deduction for distribution to beneficiaries, so DNI taxable to trust is $56,700 (taxable DNI of $63,000 $6,300 taxable distribution). [See p. 25-17 and 661(c).]
Solutions to Test Bank
25-15
49. 50.
c. d.
A "tier-one distribution" or "first-tier" distribution is any distribution of fiduciary income required to be paid currently. (See p. 25-18 and 662.) $32,625. The deduction is computed as follows: Taxable Interest $45,000 (1,500) $43,500 $32,625 Tax-exempt Total $15,000 (500) $14,500 $10,875
Income Trustee fee Distributable net income Distribution
$60,000 (2,000) $58,000 $43,500
All numbers are allocated based on the income percentages of 75 percent and 25 percent. The trust may deduct the amount of taxable DNI distributed. The total distribution of $43,500 is considered to be a proportionate distribution of both taxable and nontaxable DNI. Thus, the deduction is limited to $32,625, or 75 percent of the total distribution. [See pp. 25-14 through 25-15 and Reg. 1.661(c)-2(d).] 51. b. The separate share rule codified in 663(c) provides that if a trust contains separate substantially shares for different beneficiaries, the trusts can be treated as separate trusts for purposes of determining DNI. Thus, A would have tax liability only for the separate share of $25,000. The "separate share" rule reflects the clear intent of the grantor that A only be responsible for half of the trust income and no more. (See p. 25-21.)
25
Income Taxation of Estates and Trusts
Comprehensive Problems
FACTS
FOR
COMPREHENSIVE PROBLEMS
Rental income Dividends from equity stocks Tax-exempt interest income Long-term capital gain from stock sales Rental operating expenses Trustee fee $104,000 15,890 23,400 43,100 33,443 12,000
In the current year, the Mixon Family Trust had the following income and expense items.
Under the terms of the trust instrument, all capital gains and 50 percent of the trustee fee is allocated to the principal account. The trust instrument requires that the trustee maintain a reserve for depreciation equal to the tax depreciation deduction for the current year, which is $9,650. The trustee is required to distribute $20,000 of trust income annually to Janey Mixon; the trustee has the discretion to distribute additional amounts of income or corpus to Janey, Jonathan, or Mark Mixon. During the year, the trustee distributed $30,000 to each of the three named beneficiaries.
COMPREHENSIVE PROBLEMS
1. Calculate the following amounts for the current year and show your work. a. b. c. d. 2. Trust accounting income Trust taxable income before the deduction for distributions to beneficiaries Distributable net income (DNI) Trust taxable income
Calculate the amount and character of income distributed to each trust beneficiary for the current year.
25-17
25-18 Chapter 25
Income Taxation of Estates and Trusts
Solutions to Comprehensive Problems
1. a. Rental income Dividends from equity stocks Tax-exempt interest income Total income Rental operating expenses Reserve for depreciation Trustee fee allocated to income account Trust accounting income Rental income Dividends from equity stocks Long-term capital gain from stock sales Gross income Rental operating expenses Tax depreciation Trustee fee allocated to taxable income ($12,000 $1,960*) Personal exemption Trust taxable income before the deduction for distributions to beneficiaries *$23,400 tax-exempt income $12,000 trustee fee = $1,960 $143,290 total income $104,000 15,890 23,400 $143,290 (33,443) (9,650) (6,000) $ 94,197 $104,000 15,890 43,100 $162,990 (33,443) (9,650) (10,040) (100) $109,757
b.
c.
Trust taxable income before the deduction for distributions to beneficiaries Plus: Personal exemption net tax-exempt interest ($23,400 $1,960 trustee fee) Less: Long-term capital gain Distributable net income Trust taxable income before the deduction for distributions to beneficiaries Deduction for distributions to beneficiaries* Trust taxable income
$109,757 ,100 21,440 (43,100) $ 88,197
d.
$109,757 (66,757) $ 43,000
*Because distributions to beneficiaries ($90,000) exceeds DNI ($88,197), the entire taxable portion of DNI ($88,197 $21,400) becomes the maximum deduction to the trust.
Solutions to Comprehensive Problems
25-19
2.
The $90,000 distribution to beneficiaries exceeded DNI; therefore total DNI must be allocated to the beneficiaries: Total DNI Allocation to first-tier distribution to Janey DNI allocable to second-tier distributions Second-tier Distributions $10,000 30,000 30,000 $70,000 $ 88,197 (20,000) $ 68,197 DNI Allocations $ 9,743 29,227 29,227 $68,197
Janey Jonathan Mark Total
The composition of DNI is as follows:
Tax-exempt Interest $23,400
Gross income Rent expense Depreciation Trustee fee* Total
Rent $104,000 (33,443) (9,650) ,000 $ 60,907
Dividends $ 15,890
(10,040) $ 5,850
(1,960) $21,440
Total $143,290 (33,443) (9,650) (12,000) $ 88,197
*The trustee fee allocable to taxable income may be arbitrarily allocated to any item of taxable income [see Reg. 1.653(b)-3(b)]. Each beneficiary should report the following:
Rent $20,539 20,184 20,184 $60,907 Dividends $1,974 1,938 1,938 $5,850 Tax-exempt Interest $ 7,230 7,105 7,105 $21,440 Total $29,743 29,227 29,227 $88,197
Jonathan Mark Total
Each beneficiary's share of DNI consists of a pro rata share of each item of income included in DNI.
25
Income Taxation of Estates and Trusts
Solutions to Tax Return Problems
25-32 The solution to the MKJ Trust tax return problem in on the following pages:
25-21
25-22 Chapter 25
Income Taxation of Estates and Trusts
25-32
Form
MKJ Trust Tax Return
A Type of entity (see instr.): Decedent's estate Simple trust Complex trust Qualified disability trust ESBT (S portion only) Grantor type trust Bankruptcy estate-Ch. 7 Bankruptcy estate-Ch. 11 Pooled income fund B Number of Schedules K-1 attached (see instructions)
1041
Department of the Treasury--Internal Revenue Service
U.S. Income Tax Return for Estates and Trusts
For calendar year 2010 or fiscal year beginning
Name of estate or trust (If a grantor type trust, see page 15 of the instructions.) Name and title of fiduciary Number, street, and room or suite no. (If a P.O. box, see page 15 of the instructions.)
2010
OMB No. 1545-0092
, 2010, and ending
, 20
MKJ TRUST
C Employer identification number
D Date entity created
E Nonexempt charitable and splitinterest trusts, check applicable boxes (see page 16 of the instr.): Described in section 4947(a)(1) Not a private foundation Described in section 4947(a)(2)
11-11-00
City or town, state, and ZIP code F Check
applicable boxes:
Initial return Change in fiduciary . .
Final return . . .
Amended return Change in fiduciary's name
Change in trust's name Change in fiduciary's address
G Check here if the estate or filing trust made a section 645 election .
Tax and Payments
1 2a b 3 4 5 6 7 8 9 10 11 12 13 14 15a b 16 17 18 19 20 21 22 23 24 b c d e 25 26 27 28 29
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Total ordinary dividends . . . . . . . . . . . . . . . . . . . . . . . Qualified dividends allocable to: (1) Beneficiaries (2) Estate or trust Business income or (loss). Attach Schedule C or C-EZ (Form 1040) . . . . . . . . Capital gain or (loss). Attach Schedule D (Form 1041) . . . . . . . . . . . . . Rents, royalties, partnerships, other estates and trusts, etc. Attach Schedule E (Form 1040) Farm income or (loss). Attach Schedule F (Form 1040) . . . . . . . . . . . . . Ordinary gain or (loss). Attach Form 4797 . . . . . . . . . . . . . . . . . Other income. List type and amount Total income. Combine lines 1, 2a, and 3 through 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest. Check if Form 4952 is attached
M
SCHEDULE 1
16,476
13,524
. . . . . . .
1 2a 3 4 5 6 7 8 9 10 11 12 13 14 15a 15b 16 18 19 20 21 22 23 24a 24b 24c 24d 24e 24h 25 26 27 28 29
20,000 30,000 18,000 14,800 82,800 3,975 9,000 22,800 35,775 15,941 100 16,041 30,984 4,303 9,000 9,000 9,000 4,697 4,697
Income
. . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiduciary fees . . . . . . . . . . . . . . . . . . . . . . . . . . Charitable deduction (from Schedule A, line 7) . . . . . . . . . . . . . . . Attorney, accountant, and return preparer fees . . . . . . . . . . . . . . . Other deductions not subject to the 2% floor (attach schedule) . . . . . . . . . . Allowable miscellaneous itemized deductions subject to the 2% floor . . . . . . . . Add lines 10 through 15b . . . . . . . . . . . . . . . . . . . . . . Adjusted total income or (loss). Subtract line 16 from line 9 . . . 17 Income distribution deduction (from Schedule B, line 15). Attach Schedules K-1 (Form 1041) Estate tax deduction including certain generation-skipping taxes (attach computation) . . Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . Add lines 18 through 20 . . . . . . . . . . . . . . . . . . . . . . . Taxable income. Subtract line 21 from line 17. If a loss, see page 23 of the instructions . . Total tax (from Schedule G, line 7) . . . . . . . . . . . . . . . . . . . Payments: a 2010 estimated tax payments and amount applied from 2009 return . . . Estimated tax payments allocated to beneficiaries (from Form 1041-T) . . . . . . . Subtract line 24b from line 24a . . . . . . . . . . . . . . . . . . . . Tax paid with Form 7004 (see page 24 of the instructions) . . . . . . . . . . . . . . . . . . Federal income tax withheld. If any is from Form(s) 1099, check
SCHEDULE 1
SCHEDULE 1
Deductions
47,025
. .
2010 Tax Rates
. . . . . . .
Other payments: f Form 2439
; g Form 4136
; Total
Total payments. Add lines 24c through 24e, and 24h . . . . . . . . . . . . . Estimated tax penalty (see page 24 of the instructions) . . . . . . . . . . . . . . Tax due. If line 25 is smaller than the total of lines 23 and 26, enter amount owed . . . . . Overpayment. If line 25 is larger than the total of lines 23 and 26, enter amount overpaid . . Amount of line 28 to be: a Credited to 2011 estimated tax ; b Refunded
Sign Here
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Signature of fiduciary or officer representing fiduciary Print/Type preparer's name Date EIN of fiduciary if a financial institution Date Preparer's signature
May the IRS discuss this return with the preparer shown below (see instr.)? Yes No
Paid Preparer Use Only
For Paperwork Reduction Act Notice, see the separate instructions.
Check if self-employed Firm's EIN Phone no.
PTIN
Firm's name Firm's address
Cat. No. 11370H
Form 1041 (2010)
Solutions to Tax Return Problems
25-23
25-32
MKJ Trust Tax Return - continued
Page 2
Form 1041 (2010)
Schedule A
1 2 3 4 5 6 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1
Charitable Deduction. Do not complete for a simple trust or a pooled income fund.
1 2 3 4 5 6 7 1 2 3 4 5 6 7
Amounts paid or permanently set aside for charitable purposes from gross income (see page 25) Tax-exempt income allocable to charitable contributions (see page 25 of the instructions) . . . Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable purposes Add lines 3 and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 1202 exclusion allocable to capital gains paid or permanently set aside for charitable purposes (see page 25 of the instructions) . . . . . . . . . . . . . . . . . . . Charitable deduction. Subtract line 6 from line 5. Enter here and on page 1, line 13 . . . . .
12,000 3,000 9,000 9,000 9,000 47,025 14,675
Schedule B
Income Distribution Deduction
Adjusted total income (see page 25 of the instructions) . . . . . . . . . . . . . . . Adjusted tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . Total net gain from Schedule D (Form 1041), line 15, column (1) (see page 26 of the instructions) . Enter amount from Schedule A, line 4 (minus any allocable section 1202 exclusion) . . . . . Capital gains for the tax year included on Schedule A, line 1 (see page 26 of the instructions) . . Enter any gain from page 1, line 4, as a negative number. If page 1, line 4, is a loss, enter the loss as a positive number . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25,000 $ 1,325 $ 6,000 $ 3,000 (SCHEDULE 1)
Distributable net income. Combine lines 1 through 6. If zero or less, enter -0- . . . . . . If a complex trust, enter accounting income for the tax year as determined under the governing instrument and applicable local law . 8 Income required to be distributed currently . . . . . . . . . . . . . . . . . . Other amounts paid, credited, or otherwise required to be distributed . . . . . . . . . Total distributions. Add lines 9 and 10. If greater than line 8, see page 26 of the instructions . Enter the amount of tax-exempt income included on line 11 . . . . . . . . . . . . Tentative income distribution deduction. Subtract line 12 from line 11 . . . . . . . . . Tentative income distribution deduction. Subtract line 2 from line 7. If zero or less, enter -0- . Income distribution deduction. Enter the smaller of line 13 or line 14 here and on page 1, line 18
SCHEDULE 1 58,350
.
18,000 43,700 24,000 24,000 8,059 15,941 29,025 15,941
(SCHEDULE 1) $ 14,675 x 54.92%
. . . . . .
9 10 11 12 13 14 15
Schedule G
Tax Computation (see page 27 of the instructions)
1a 1b 1c . 2a 2b 2c 2d . . . . .
2a b c d 3 4 5 6 7 1 2 3
Tax: a Tax on taxable income (see page 27 of the instructions) . . b Tax on lump-sum distributions. Attach Form 4972 . . . . c Alternative minimum tax (from Schedule I (Form 1041), line 56) d Total. Add lines 1a through 1c . . . . . . . . . . Foreign tax credit. Attach Form 1116 . . . . . . . . . . . General business credit. Attach Form 3800 . . . . . . . . . Credit for prior year minimum tax. Attach Form 8801 . . . . . Bond credits. Attach Form 8912 . . . . . . . . . . . . Total credits. Add lines 2a through 2d . . . . . . . . . . Subtract line 3 from line 1d. If zero or less, enter -0- . . . . . . Recapture taxes. Check if from: Form 4255 Form 8611 . Household employment taxes. Attach Schedule H (Form 1040) . . Total tax. Add lines 4 through 6. Enter here and on page 1, line 23 .
4,303
. . . . . .
. . . . . . . . . .
.
1d
4,303
. . . . .
. . . . .
. . . . .
. . . . .
. . . . .
. . . . .
. . . . .
. . .
3 4 5 6 7
4,303 4,303
Yes No
Other Information
Did the estate or trust receive tax-exempt income? If "Yes," attach a computation of the allocation of expenses Enter the amount of tax-exempt interest income and exempt-interest dividends $ Did the estate or trust receive all or any part of the earnings (salary, wages, and other compensation) of any individual by reason of a contract assignment or similar arrangement? . . . . . . . . . . . . . . . At any time during calendar year 2010, did the estate or trust have an interest in or a signature or other authority over a bank, securities, or other financial account in a foreign country? . . . . . . . . . . . . . . See page 29 of the instructions for exceptions and filing requirements for Form TD F 90-22.1. If "Yes," enter the name of the foreign country During the tax year, did the estate or trust receive a distribution from, or was it the grantor of, or transferor to, a foreign trust? If "Yes," the estate or trust may have to file Form 3520. See page 29 of the instructions . . . . Did the estate or trust receive, or pay, any qualified residence interest on seller-provided financing? If "Yes," see page 29 for required attachment . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,000
4 5 6 7 8 9
If this is an estate or a complex trust making the section 663(b) election, check here (see page 29) . To make a section 643(e)(3) election, attach Schedule D (Form 1041), and check here (see page 29) . Are any present or future trust beneficiaries skip persons? See page 29 of the instructions . . . .
. . .
If the decedent's estate has been open for more than 2 years, attach an explanation for the delay in closing the estate, and check here
.
.
.
Form 1041 (2010)
25-24 Chapter 25
Income Taxation of Estates and Trusts
25-32
MKJ Trust Tax Return - continued
OMB No. 1545-0092
SCHEDULE D (Form 1041)
Department of the Treasury Internal Revenue Service Name of estate or trust
Capital Gains and Losses
Attach to Form 1041, Form 5227, or Form 990-T. See the Instructions for Schedule D (Form 1041) (also for Form 5227 or Form 990-T, if applicable).
2010
MKJ TRUST
Short-Term Capital Gains and Losses--Assets Held One Year or Less
(b) Date acquired (mo., day, yr.) (c) Date sold (mo., day, yr.) (d) Sales price
Employer identification number
Note: Form 5227 filers need to complete only Parts I and II.
Part I
(a) Description of property (Example: 100 shares 7% preferred of "Z" Co.)
(e) Cost or other basis (see instructions)
(f) Gain or (loss) for the entire year Subtract (e) from (d)
1a
b Enter the short-term gain or (loss), if any, from Schedule D-1, line 1b 2 3 4 5
.
.
. .
. .
. .
. .
. .
. .
. .
. .
1b 2 3 4 5
(f) Gain or (loss) for the entire year Subtract (e) from (d)
Short-term capital gain or (loss) from Forms 4684, 6252, 6781, and 8824 .
Net short-term gain or (loss) from partnerships, S corporations, and other estates or trusts . . . Short-term capital loss carryover. Enter the amount, if any, from line 9 of the 2009 Capital Loss Carryover Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . Net short-term gain or (loss). Combine lines 1a through 4 in column (f). Enter here and on line 13, column (3) on the back . . . . . . . . . . . . . . . . . . . . . . . .
(
)
Part II
Long-Term Capital Gains and Losses--Assets Held More Than One Year
(b) Date acquired (mo., day, yr.) (c) Date sold (mo., day, yr.) (d) Sales price (e) Cost or other basis (see instructions)
(a) Description of property (Example: 100 shares 7% preferred of "Z" Co.)
6a
GENERAL MOTOR
11/11/00 12/02/10
48,000.
30,000.
18,000.
b Enter the long-term gain or (loss), if any, from Schedule D-1, line 6b 7 8 9 10 11 12
.
.
.
.
. .
. .
. .
. .
. . . .
. . . .
6b 7 8 9 10 11 ( 12 )
Long-term capital gain or (loss) from Forms 2439, 4684, 6252, 6781, and 8824 .
Net long-term gain or (loss) from partnerships, S corporations, and other estates or trusts . Capital gain distributions . . . . . . . . . . . . . . . . . . . . . . .
Gain from Form 4797, Part I . . . . . . . . . . . . . . . . . . . . . . . . Long-term capital loss carryover. Enter the amount, if any, from line 14 of the 2009 Capital Loss Carryover Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . Net long-term gain or (loss). Combine lines 6a through 11 in column (f). Enter here and on line 14a, column (3) on the back . . . . . . . . . . . . . . . . . . . . . . . .
Cat. No. 11376V
18,000.
For Paperwork Reduction Act Notice, see the Instructions for Form 1041.
Schedule D (Form 1041) 2010
Solutions to Tax Return Problems
25-25
25-32
MKJ Trust Tax Return - continued
Page
Schedule D (Form 1041) 2010
2
Part III
13 14 a b c 15
Summary of Parts I and II
Caution: Read the instructions before completing this part. Net short-term gain or (loss) . . . . . . . . . . 13 Net long-term gain or (loss): Total for year . . . . . . . . . . . . . . . 14a Unrecaptured section 1250 gain (see line 18 of the wrksht.) . 14b 28% rate gain . . . . . . . . . . . . . . . 14c Total net gain or (loss). Combine lines 13 and 14a . . 15
(1) Beneficiaries' (see instr.)
(2) Estate's or trust's
(3) Total
18,000. 18,000.
18,000. 18,000.
Note: If line 15, column (3), is a net gain, enter the gain on Form 1041, line 4 (or Form 990-T, Part I, line 4a). If lines 14a and 15, column (2), are net gains, go to Part V, and do not complete Part IV. If line 15, column (3), is a net loss, complete Part IV and the Capital Loss Carryover Worksheet, as necessary.
Part IV
16 a
Capital Loss Limitation
16 ( )
Enter here and enter as a (loss) on Form 1041, line 4 (or Form 990-T, Part I, line 4c, if a trust), the smaller of: The loss on line 15, column (3) or b $3,000 . . . . . . . . . . . . . . . . .
Note: If the loss on line 15, column (3), is more than $3,000, or if Form 1041, page 1, line 22 (or Form 990-T, line 34), is a loss, complete the Capital Loss Carryover Worksheet on page 7 of the instructions to figure your capital loss carryover.
Part V
Tax Computation Using Maximum Capital Gains Rates
Form 1041 filers. Complete this part only if both lines 14a and 15 in column (2) are gains, or an amount is entered in Part I or Part II and there is an entry on Form 1041, line 2b(2), and Form 1041, line 22, is more than zero. Caution: Skip this part and complete the worksheet on page 8 of the instructions if: Either line 14b, col. (2) or line 14c, col. (2) is more than zero, or Both Form 1041, line 2b(1), and Form 4952, line 4g are more than zero. Form 990-T trusts. Complete this part only if both lines 14a and 15 are gains, or qualified dividends are included in income in Part I of Form 990-T, and Form 990-T, line 34, is more than zero. Skip this part and complete the worksheet on page 8 of the instructions if either line 14b, col. (2) or line 14c, col. (2) is more than zero.
17 18 19
Enter taxable income from Form 1041, line 22 (or Form 990-T, line 34) . Enter the smaller of line 14a or 15 in column (2) but not less than zero . . . . . . . . . 18
Enter the estate's or trust's qualified dividends from Form 1041, line 2b(2) (or enter the qualified dividends included in income in Part I of Form 990-T) . . . .
.
17
30,984.
18,000. NLTCG 13,524. QUALIFIED DIVIDENDS 31,524.
20 21 22 23 24 25
Add lines 18 and 19 . . . . . . . . . If the estate or trust is filing Form 4952, enter the amount from line 4g; otherwise, enter -0- . .
19 20 21 . .
Subtract line 21 from line 20. If zero or less, enter -0Subtract line 22 from line 17. If zero or less, enter -0-
. .
. .
. .
. .
0.
. .
. . .
22 23 24
31,524. 0. 2,300. 0. 2,300. 30,984. 2,300. 28,684.
30 31 32 33 34
26 27
Enter the smaller of the amount on line 17 or $2,300 . . . . . . Is the amount on line 23 equal to or more than the amount on line 24? Yes. Skip lines 25 and 26; go to line 27 and check the "No" box. No. Enter the amount from line 23 . . . . . . . . . . . Subtract line 25 from line 24 . . . . . . . . . . . . . . Are the amounts on lines 22 and 26 the same?
Yes. Skip lines 27 thru 30; go to line 31.
. .
25 26 27 28
No. Enter the smaller of line 17 or line 22
28 29 30 31
Enter the amount from line 26 (If line 26 is blank, enter -0-)
.
.
.
.
.
Subtract line 28 from line 27 . . . . . . . . . . . . Multiply line 29 by 15% (.15) . . . . . . . . . . . . Figure the tax on the amount on line 23. Use the 2010 Tax Rate (see the Schedule G instructions in the instructions for Form 1041)
. . . 29 . . . . . . . . . . . Schedule for Estates and Trusts . . . . . . . . . . .
4,303. 0. 4,303. 9,809. 4,303.
32 33 34
Add lines 30 and 31 . . . . . . . . . . . . . . . . . . . . . . . . . . Figure the tax on the amount on line 17. Use the 2010 Tax Rate Schedule for Estates and Trusts (see the Schedule G instructions in the instructions for Form 1041) . . . . . . . . . . . Tax on all taxable income. Enter the smaller of line 32 or line 33 here and on Form 1041, Schedule G, line 1a (or Form 990-T, line 36) . . . . . . . . . . . . . . . . . . . . . .
Schedule D (Form 1041) 2010
25-26 Chapter 25
Income Taxation of Estates and Trusts
25-32
MKJ Trust Tax Return - continued
SCHEDULE E (Form 1040)
Department of the Treasury Internal Revenue Service (99) Name(s) shown on return
Attach
Supplemental Income and Loss
(From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.)
to Form 1040, 1040NR, or Form 1041.
See
OMB No. 1545-0074
Instructions for Schedule E (Form 1040).
Part I
1 A B C Income:
MKJ TRUST
Attachment Sequence No. 13 Your social security number
2010
Income or Loss From Rental Real Estate and Royalties Note. If you are in the business of renting personal property, use
Schedule C or C-EZ (see page E-3). If you are an individual, report farm rental income or loss from Form 4835 on page 2, line 40.
RENTAL PROPERTY
List the type and address of each rental real estate property:
3 Rents received . . . . . . 4 Royalties received . . . . . Expenses: 5 Advertising . . . . . . . 6 Auto and travel (see page E-5) . 7 Cleaning and maintenance . . 8 Commissions. . . . . . . 9 Insurance . . . . . . . . 10 Legal and other professional fees 11 Management fees . . . . . 12 Mortgage interest paid to banks, etc. (see page E-5) . . 13 Other interest. . . . . . . 14 Repairs. . . . . . . . . 15 Supplies . . . . . . . . 16 Taxes . . . . . . . . . 17 Utilities . . . . . . . . . 18 Other (list)
3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
25,000
A
Yes No 2 For each rental real estate property listed on line 1, did you or your family use it during the tax year for personal A purposes for more than the greater of: 14 days or B 10% of the total days rented at fair rental value? (See page E-4) C Properties Totals (Add columns A, B, and C.) B C 3 4
X
25,000
12
4,200 4,000
18
19 20 21 22
Add lines 5 through 18. . . . 19 Depreciation expense or depletion (see page E-5) . . . 20 Total expenses. Add lines 19 and 20 21 Income or (loss) from rental real estate or royalty properties. Subtract line 21 from line 3 (rents) or line 4 (royalties). If the result is a (loss), see page E-6 to find out if you must file Form 6198 . . 22
8,200 2,000 10,200 RESERVE ALLOCATED TO TRUST
19 20
8,200 2,000
14,800
23
24 25 26
Deductible rental real estate loss. Caution. Your rental real estate loss on line 22 may be limited. See page E-6 to find out if you must file Form 8582. Real estate professionals )( )( ) must complete line 43 on page 2 . 23 ( Income. Add positive amounts shown on line 22. Do not include any losses . . . . . . . 24 Losses. Add royalty losses from line 22 and rental real estate losses from line 23. Enter total losses here 25 ( Total rental real estate and royalty income or (loss). Combine lines 24 and 25. Enter the result here. If Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amount on Form 1040, line 17, or Form 1040NR, line 18. Otherwise, include this amount in the total on line 41 on page 2 . . . . . .
Cat. No. 11344L
14,800
)
26
14,800
For Paperwork Reduction Act Notice, see your tax return instructions.
Schedule E (Form 1040) 2010
Solutions to Tax Return Problems
25-27
25-32
MKJ Trust Tax Return - continued
661110
Final K-1 Amended K-1 OMB No. 1545-0092
Schedule K-1 (Form 1041)
Department of the Treasury Internal Revenue Service For calendar year 2010, or tax year beginning and ending
2010
, 2010, , 20
Part III
1
Beneficiary's Share of Current Year Income, Deductions, Credits, and Other Items
Interest income Ordinary dividends Qualified dividends
2a
Beneficiary's Share of Income, Deductions, See back of form and instructions. Credits, etc.
Part I
A
879 12,316 12,316
11
Final year deductions
2b
3
Net short-term capital gain Net long-term capital gain 28% rate gain Unrecaptured section 1250 gain 12 Alternative minimum tax adjustment
Information About the Estate or Trust
4a
Estate's or trust's employer identification number
4b B
MKJ TRUST
Estate's or trust's name 4c
5 C
Other portfolio and nonbusiness income
BRENDA JACOBS
Fiduciary's name, address, city, state, and ZIP code 6 Ordinary business income Net rental real estate income 13 Credits and credit recapture Other rental income
7
SEE SCHEDULE 1 FOR ALLOCATION
D Check if Form 1041-T was filed and enter the date it was filed
8 9
2,746 15,941 15,941
14 Other information
Directly apportioned deductions
E
Check if this is the final Form 1041 for the estate or trust 10 Estate tax deduction
Part II
F
Information About the Beneficiary
Beneficiary's identifying number Beneficiary's name, address, city, state, and ZIP code
15,941
A
8,059 15,941
E
G
*See attached statement for additional information. Note. A statement must be attached showing the beneficiary's share of income and directly apportioned deductions from each business, rental real estate, and other rental activity.
H
Domestic beneficiary
Foreign beneficiary
For Paperwork Reduction Act Notice, see the Instructions for Form 1041.
For IRS Use Only
Cat. No. 11380D
Schedule K-1 (Form 1041) 2010
25-28 Chapter 25
Income Taxation of Estates and Trusts
25-32
MKJ Trust Tax Return - continued
MKJ Trust--Form 1041, Schedule 1 Line 2b: Determination of qualified dividends for trust and beneficiaries Qualified dividends are taxed at a maximum rate of 15% (5% if in the 15% tax bracket). A special calculation must be made to determine the amount of qualified dividends retained by the trust to be taxed at the favorable rate. The gross amount of qualified dividends, $30,000, is allocated between the trust and the beneficiaries based on the percentage of distributable net income (DNI) distributed to the beneficiaries. In this case, the total DNI was $43,700 and the trust distributed DNI of $24,000 or 54.92% ($24,000/ $43,700) of the DNI to the beneficiary. Thus the qualified dividends retained by the trust are $13,524 computed as follows: Qualified dividends Allocation to beneficiary DNI distributed to beneficiary $24;000 Total DNI $43;700 Allocation to trust $30,000 $30,000
54.92%
(16,476) $13,524
Note that this method of allocating the amount of qualified dividends between the beneficiary and the trust is used solely for this purpose; that is, for calculating the tax liability of the trust. The actual amount of qualified dividends to be reported on the Schedule K-1 which the beneficiary must report is $7,154 as shown below. Lines 12 and 13: $75;000 Taxable trust income $5;300 $3;975 Trustee fee $100;000 Trust income $75;000 Taxable trust income $12;000 $9;000 Charitable contribution $100;000 Trust income Calculation of DNI components: Rent $25,000 (6,800) (10,200) (3,000) $ 5,000 Dividends $30,000 (3,975) Taxable Interest $20,000 (16,000) (3,600) $22,425 (2,400) $1,600 Tax-exempt Interest $25,000 (1,325) (6,000) (3,000) $14,675 DNI Total $100,000 (5,300) (28,800) (10,200) (12,000) $ 43,700
Gross Trustee fee Legal fee Rent expense Contribution DNI
$24;000 Distribution 54:92% $43;700 DNI Note: If computer software is used, the allocation of expenses may differ. The software may minimize the amount of expenses allocated to qualified dividend income.
Solutions to Tax Return Problems
25-29
The Schedule K-1 for Brenda reflects her 54.92% ($24,000/$43,700) of each component of DNI as follows Taxable Interest $1,600 54.92% $ 879 Tax-Exempt Interest $14,675 54.92% $ 8,059 DNI Total $43,700 54.92% $24,000
Components of DNI DNI (see above) DNI to beneficiary/total DNI $24,000/$43,700 = 54.92% Schedule K-1 amounts
Rent $5,000 54.92% $2,746
Dividends $22,425 54.92% $ 12,316
Schedule B Line 8 Trust Accounting Income Trust Accounting Income $ 30,000 25,000 25,000 20,000 -- $100,000 (2,650) (2,000) (4,000) (4,200) (28,800) $ 58,350
Income/Expenses Dividends Rents Tax-exempt interest Taxable interest Capital gains Total Commissions to income Commissions to corpus Depreciation reserve Real estate taxes Repairs and maintenance Legal fee Total
Amount $ 30,000 25,000 25,000 20,000 18,000 $118,000 (2,650) (2,650) (2,000) (4,000) (4,200) (28,800)
Schedule B Line 12 Tax-exempt income included in $24,000 distribution Total DNI Percent exempt ($14,675/$43,700) Percent taxable Amount of DNI distributed to beneficiary Net tax-exempt in amount distributed Alternative computation: Net tax exempt amount Percent of DNI received ($24,000/$43,700) Net tax-exempt in amount distributed $14,675 54.92% $ 8,059 $43,700 33.6% 66.4% $24,000 33.58% $ 8,059