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Unformatted text preview: H Chapter Fifteen H INCOME TAXATION OF ESTATES AND TRUSTS SOLUTIONS TO RESEARCH PROBLEM RESEARCH PROBLEMS 15-33 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).] 5- 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 trusts DNI for the current year. 15-1 H Chapter Fifteen H INCOME TAXATION OF ESTATES AND TRUSTS TEST BANK True or False 1. There is no statutory period after which a decedents estate must be terminated. 2. Both estates and trusts may pay any income tax due for a year with a timely filed return....
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- Spring '11