ch16 - H Chapter Sixteen H FAMILY TAX PLANNING SOLUTIONS TO...

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H Chapter Sixteen H FAMILY TAX PLANNING SOLUTIONS TO RESEARCH PROBLEMS RESEARCH PROBLEMS 16-42 This trust may be considered a grantor trust under § 677(b), which provides that ‘‘income of a trust shall not be considered taxable to the grantor merely because such income in the discretion of another person, the trustee, or the grantor acting as trustee or co-trustee, may be appointed or distributed for the support or maintenance of a beneficiary (other than the grantor’s spouse) whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed.’’ The income from the trust was, in fact, distributed to the beneficiary S and used by him to pay educational expenses. Therefore, the research question is whether educational expenses are regarded as support and maintenance that P is legally required to provide to his son S. 5- The Internal Revenue Service has long made the argument that parents have a legally enforceable responsibility to pay the school and college bills of their children [see Morrill, Jr. v. U.S. , 228 F . Supp 734 (D.Ct. Maine, 1964)]. However, Federal courts have consistently looked to the laws of the state in which the grantor is a resident to determine the status of educational costs as support and maintenance payments. In Braun, Jr. , 48 TCM 210, T.C. Memo 1984 -285, the Tax Court had to consider whether residents of the state of New Jersey were legally obligated under state law to pay college tuition and room and board expenses of an unmarried child over the age of 18. The Court held that ‘‘the import to our facts is clearly that petitioners retained the obligation to provide their children with a college education. They were both willing and able to do so, a college education was imminently reasonable in the light of the background, values, and goals of the parents as well as the children, and petitioners have brought forward no facts or arguments which would militate against the recognition of this obligation on the part of these particular parents.’’ 5- The answer to the research question involving P and his son S will depend on the nature of the support obligation imposed on P under the laws of Missouri. If the law stipulates that a parent with P’s financial and social status, and with P’s expectations concerning the suitable education of his children, is required to provide that education, then § 677(b) will control, and the $7,000 of trust income will be taxed to P rather than to S. If P is not required to provide a college education for S, the grantor trust rules are inapplicable and the income will be taxed to S under the rules of Subchapter J. 16-43 It is well established that the refusal to accept an inheritance may constitute the transfer of a property interest subject to the Federal gift tax (see Rev. Rul. 76-156, 1976-1 C.B. 292). However, § 2518 provides a statutory exception to this general rule. Per § 2518(a), a person who makes a ‘‘qualified disclaimer’’
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This note was uploaded on 07/26/2011 for the course TAX 772 taught by Professor Ber during the Spring '11 term at Hartford.

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ch16 - H Chapter Sixteen H FAMILY TAX PLANNING SOLUTIONS TO...

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