ch28

COMPREHENSIVE VOLUME--CHAPTER 28--INCOME

TAXATION OF TRUSTS AND ESTATES

Student: ___________________________________________________________________________

1. Tax planning motivations usually predominate over other objectives in deciding whether to create a trust.

True False

2. A trust might be used when a married couple is divorcing.

True False

3. Like a corporation, the fiduciary reports and pays its own Federal income tax liability.

True False

4. An estates remainder beneficiary generally must wait until the entity is terminated by the executor to receive any distributions.

True False

5. With respect to a trust, the terms creator, donor, and grantor are synonyms.

True False

6. Corpus, principal, and assets of the trust are synonyms.

True False

7. If provided for in the controlling agreement, a trust might terminate when the income beneficiary reaches age

35.

True False

8. Under IRS regulations, the decedents estate must terminate within four years of the date of death, so as to minimize income-shifting techniques.

True False

9. Trusts can select any Federal income tax year-end.

True False

10. A complex trust pays tax on the income that it accumulates, i.e., that it does not distribute.

True False

11. A complex trust automatically is exempt from the Federal AMT.

True False

12. The first step in computing an estates taxable income is the determination of its fiduciary accounting income for the year.

True False

13. Generally, capital gains are allocated to fiduciary income, because they arise from current-year transactions

as directed by the trustee.

True False

14. Usually, a beneficiary takes a carryover basis when a trust distributes a non-cash asset.

True False

15. A decedents income in respect of a decedent is subject to the Federal income tax, but it is excluded from the estate tax.

True False

16. An example of income in respect of a decedent is the taxpayers last paycheck, uncollected at death. True False

17. When a trust operates a trade or business, it can claim a deduction for wages paid to employees.

True False

18. Estates and trusts can claim Federal income tax deductions for costs incurred in maintaining investments in

U.S. state and local bonds.

True False

19. The Stratford Estate incurs a $25,000 casualty loss in disposing of the real property of the decedent. The

deduction is claimed against the Federal estate tax, unless by election it is claimed on the estates income tax return.

True False

20. The Stratford Estate incurs a $25,000 legal fee in disposing of the real property of the decedent. The

executor can decide to claim a $5,000 deduction against the Federal estate tax, and a $20,000 deduction on the

estates income tax return. True False

21. Judy can claim one-third of the Sweet Estates cost recovery deductions, because she received one-third of the fiduciarys distributable net income (DNI). True False

22. The Malik Estate operates a manufacturing business. Malik made no income distributions this year. It can

claim a domestic production activities deduction (DPAD).

True False

23. The Whitmer Trust operates a manufacturing business and distributes the profits to its income

beneficiaries. Whitmer also passes through to the income beneficiaries the data needed to compute their

domestic production activities deduction.

True False

24. The Whitmer Trust operates a manufacturing business. When Whitmer incurs a net operating loss, the

current-year deduction passes through to the income beneficiaries.

True False

25. The Griffin Trust makes a gift of long-term capital gain property to a qualifying charity. Griffins entity-level deduction cannot exceed 30% of distributable net income.

True False

26. The Julius Trust made a gift to the United Charity on August 1, Year Two, from its Year One business

profits. The trusts charitable contribution deduction can be claimed in either Year One or Year Two. True False

27. Sixty percent of the income received by the Atom Trust this year constituted municipal bond interest.

Atoms trustee also made a $100,000 gift to the United Fund, a qualifying charity. The charitable deduction associated with this gift is limited to $60,000.

True False

28. A fiduciarys distribution deduction shifts the tax burden for the distributed amount of current-year income from the entity to the beneficiary.

True False

29. Harry, the sole income beneficiary, received a $40,000 distribution from the Lucy Trust, in a year when the

trusts distributable net income was $30,000. Harrys AGI can increase by as much as $40,000. True False





32. One-fourth of the Cruger Estates distributable net income consists of net long-term capital gains. Thus, when income beneficiary Susie receives a $40,000 income distribution from the estate, $10,000 of it qualifies

for the 15% tax rate.

True False

33. In computing distributable net income (DNI) for a trust, one removes any net capital gain or loss that is

allocable to income.

True False

34. The Gable Trust reports $20,000 business income and $10,000 exempt interest income, and it paid a $3,000

fiduciary fee. Gables distributable net income (DNI) includes $9,000 for the interest income. True False


fiduciary fee. Gables distributable net income includes $10,000 of net tax-exempt income. True False


fiduciary fee. Gables distributable net income includes $10,000 for the interest income. True False

37. The Crown Trust distributed one-half of its accounting income to Lee this year. Lee also is allocated

one-half of Crowns credit for building low-income housing. True False

38. First-tier distributions allowed by the will or trust document are made at the discretion of the executor or trustee.

True False

39. When DNI includes exempt interest income, the beneficiary includes less than the full amount of DNI in

current-year gross income.

True False

40. In the year in which an estate terminates, its beneficiaries receive and can use as their own any unexpired

NOL carryforwards, proportionate to the value of the corpus assets that they received.

True False

41. The unextended due date for a calendar-year trust to file its Form 1041 is March 15.

True False

42. Tax planning usually dictates that high-income and -wealth individuals be specified as second-tier

beneficiaries of a trust arrangement.

True False

43. When a trust distributes an in-kind asset with a realized loss, most likely this loss cannot be immediately

deducted by the first-tier beneficiary.

True False

44. The Philmore Estate is subject to a 40% Federal estate tax rate and a 45% Federal and state income tax

rate. Generally, an administrative expense should be claimed on the estates income tax return. True False

45. Generally, an administrative expense attributable to municipal bond interest should be claimed on the

estates Form 706. True False

46. The tax rules regarding the income taxation of trusts and estates are included in which Subchapter of the

Internal Revenue Code?

A. C.

B. J.

C. K.

D. S.

47. Which of the following is a typical duty of an executor of an estate?

A. Pay funeral expenses.

B. Pay off the decedents financial liabilities. C. Distribute the net assets of the probate estate.

D. Manage the decedents assets until they are liquidated or distributed. E. All of the above

48. Which of the following is a typical duty of a trustee?

A. Modify the language of the trust instrument so as to lower the entitys Federal income tax. B. Make decisions as to how to invest the trust corpus portfolio.

C. Allocate items between income and corpus using Subchapter J rules.

D. All of the above.

49. Which of the following is a typical duty of a trustee?

A. File the entitys state and Federal income tax returns. B. Invest the assets that comprise the corpus of the entity.

C. Distribute entity accounting income to the beneficiaries in accordance with the provisions of the trust

instrument.


50. The Code defines a simple trust as which of the following? A. One which is allowed to file Form 1041-EZ.

B. One which has only one income beneficiary.

C. One whose grantor was an individual who still is alive.

D. One which must distribute its accounting income every year.

51. Which of the following taxpayers can be subject to an entity-level Federal income tax?

A. Complex trust.

B. Partnership.

C. Limited liability company.

D. All of the above taxpayers are passthrough entities, and they never are subject to an entity-level Federal

income tax.

52. Which of the following taxpayers use a Schedule K and K-1 to pass through income, loss, and credit

amounts to the owners or beneficiaries?

A. Complex trust.

B. Partnership.

C. S corporation.

D. All of the above taxpayers use Schedules K and K-1.

53. The Chen Trust is required to distribute its accounting income every year, one-half to Missy Chen, and

one-half to the local churchs homeless shelter. What is the Chen Trusts personal exemption? A. $0.

B. $100.

C. $300.

D. $600.

54. The Prakash Estate has equal income beneficiaries Sam and Janet. As allowed by the terms of the will, the

estate makes no income distributions during the current tax year. The estates personal exemption is: A. $0.

B. $100.

C. $300.

D. $600.

55. The Prakash Trust is required to pay its entire annual accounting income to beneficiaries Sam and Janet. The

trusts personal exemption is: A. $0.

B. $100.

C. $300.

D. $600.

56. The Prakash Trust is required to pay its entire annual accounting income to the Daytona Museum, a

qualifying charity. The trusts personal exemption is: A. $0.

B. $100.

C. $300.

D. $600.

57. The Rodriguez Trust generated $300,000 in alternative minimum taxable income (AMTI) this year. The

trust is subject to a marginal Federal income tax rate of:

A. 26%.

B. 28%.

C. 33%.

D. 35%.

58. The trustee of the Epsilon Trust distributed an asset to Telly, a qualifying income beneficiary. The assets basis to the trust was $10,000, and its fair market value on the distribution date was $25,000. Which of the

following statements is true?

A. Assuming that the trustee made an election under 643(e), the trust is allowed a $10,000 distribution

deduction for this transaction.

B. Assuming that the trustee made an election under 643(e), Telly recognizes $10,000 gross income on the

distribution.

C. Lacking any election by the trustee, the trust recognizes $15,000 gross income on the distribution.

D. Lacking any election by the trustee, Tellys basis in the asset is $10,000. E. Lacking any election by the trustee, Tellys basis in the asset is stepped up to $25,000.

59. Three months after Brianna Timkin died, her executor received the final $40,000 installment from a sale of

land that Brianna completed several years ago. Which of the following statements is true?

A. The $40,000 is both included in Briannas gross estate, and subject to tax on her estates income tax return. B. The $40,000 is subject to neither income nor estate tax, because it was received after Briannas death. C. The $40,000 is subject to tax only on her estates income tax return. D. The $40,000 is included only in Briannas gross estate.

60. Income beneficiary Turk received $30,000 from the Urgent Trust. Trust accounting income for the year was

$100,000. The trust generated $20,000 in cost recovery deductions. How much can Turk deduct with respect to

the cost recovery deductions that Urgent generated?

A. $0.

B. $6,000.

C. $14,000.

D. $20,000.

61. Three weeks after Abed died, his brother Tony properly received Abeds last paycheck from his employer. The gross amount of the check was $4,000, and a $300 deduction for state income taxes was subtracted in

computing the net amount of the payment. Which of the following statements is true?

A. The $300 is deductible on neither Tonys income tax return nor on Abeds estate tax return. B. The $300 is deductible both on Tonys income tax return and on Abeds estate tax return. C. The $300 is deductible only in computing Abeds taxable estate. D. The $300 is deductible only on the income tax return of Abeds estate.

62. The Chen Trust incurred the following items during the year.

Taxable interest received $40,000

Tax-exempt interest received 60,000

Tax preparation fees paid 5,000

What is Chens deduction for the tax preparation fees?

A. $0.

B. $2,000.

C. $3,000.

D. $5,000.

63. Which, if any, of the following statements relates to the tax treatment of both estates and trusts?

A. The termination date of the entity is specified in the controlling document.

B. The entity must use the same tax year as its creator (i.e., grantor, decedent).

C. The entity is required to distribute all of its income currently to its beneficiaries.

D. In the year of its termination, the entitys net operating loss carryovers are passed through to its beneficiaries.

64. The distributable net income (DNI) of a fiduciary taxpayer:

A. Constitutes the maximum amount for the fiduciarys distribution deduction. B. Specifies the character of the distributions in the hands of the years income beneficiaries. C. Marks the maximum amount of gross income that income beneficiaries must report when receiving

distributions.


65. Which of the following is the annual maximum amount to be included as gross income by all of the income

beneficiaries of the trust or estate?

A. Entity taxable income.

B. Entity adjusted gross income.

C. Distributable net income.

D. Fiduciary accounting income.

66. This year, the Nano Trust reported $50,000 entity accounting income and $40,000 distributable net income

(DNI). Nano distributed $30,000 cash to Horatio, its sole income beneficiary. Nano is a complex

trust. Nanos distribution deduction is: A. $50,000.

B. $40,000.

C. $30,000.

D. $0. Because the distributions of a complex trust are discretionary, no deduction is allowed.

67. This year, the Nano Trust reported $50,000 entity accounting income and $40,000 distributable net income

(DNI). Nano distributed $60,000 cash to Horatio, its sole income beneficiary. Nano is a simple trust. Nanos distribution deduction is:

A. $60,000.

B. $50,000.

C. $40,000.

D. $0.

68. This year, the Huang Trust is a complex trust. This year, it distributed all of its accounting income and

$5,000 from corpus, to its sole income beneficiary Kun. Huangs taxable income for the year is: A. $0.

B. ($100).

C. ($300).

D. ($5,000).

69. The Doyle Trust reports distributable net income for the year of $100,000 and no income from tax-exempt

sources. Under the terms of the trust instrument, the trustee must distribute $30,000 to Roger and $30,000 to

Sally. After payment of these amounts, the trustee is empowered to make additional distributions at its

discretion. Exercising this authority, the trustee distributes an additional $25,000 to Roger and $25,000 to Sally.

How much income from the trust must Sally recognize?

A. $25,000.

B. $30,000.

C. $50,000.

D. $55,000.



Sally. After paying these amounts, the trustee is empowered to make additional distributions at its discretion.

Exercising this authority, the trustee distributes an additional $25,000 to Roger and $50,000 to Sally. How much

gross income from the trust must Sally recognize?

A. $70,000.

B. $60,000.

C. $40,000.

D. $20,000.




Exercising this authority, the trustee distributes an additional $25,000 to Roger and $50,000 to Sally. How much

gross income from the trust must Roger recognize?

A. $50,000.

B. $45,000.

C. $40,000.

D. $20,000.

72. The Uldis Trust reports distributable net income for the year of $100,000 and no income from tax-exempt



Exercising this authority, the Uldis trustee distributes an additional $10,000 to Roger and $30,000 to Sally. How

much gross income from the trust must Sally recognize?

A. $30,000.

B. $50,000.

C. $100,000.

D. $105,000.

73. The Uldis Trust has distributable net income (DNI) for the year of $100,000 and no income from

tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $75,000 to Roger and

$75,000 to Sally. After paying these amounts, the trustee is empowered to make additional distributions at its

discretion. Exercising this authority, the Uldis trustee distributes an additional $10,000 to Roger and $30,000 to

Sally. How much gross income from the trust must Roger recognize?

A. $10,000.

B. $50,000.

C. $75,000.

D. $85,000.

74. During the current year, the Santo Trust received $30,000 of taxable interest income, paid trustees commissions of $3,000, and had no other income or expenses. The Santo trust instrument requires that $20,000

be paid annually to Marilyn, and $40,000 be paid annually to Domingo. How much gross income must Marilyn

and Domingo recognize?

A. $20,000 by Marilyn and $40,000 by Domingo.

B. $15,000 by Marilyn and $15,000 by Domingo.

C. $13,500 by Marilyn and $13,500 by Domingo.

D. $9,000 by Marilyn and $18,000 by Domingo.

75. The Brighton Trust has distributable net income for the year of $100,000 and no income from tax-exempt

sources. Under the terms of the trust instrument, the trustee is required to distribute $25,000 to Roger and

$50,000 to Sally. After payment of these amounts, the trustee is empowered to make additional distributions at

its discretion. Exercising this authority, the Brighton trustee distributes an additional $20,000 to Roger, and

$30,000 to Sally. How much income from the trust must Sally recognize?

A. $80,000.

B. $65,000.

C. $50,000.

D. $30,000.

76. The Zhao Estate generated distributable net income (DNI) this year of $100,000, one-fourth of which was

tax-exempt interest, and the balance of which was long-term capital gain. Kyle Zhao, the sole income

beneficiary of the estate, received a distribution of the entire $125,000 accounting income of the entity. How

does Kyle report the distribution?

A. $75,000 long-term capital gain, $25,000 exempt interest.

B. $50,000 long-term capital gain, $50,000 exempt interest.

C. $75,000 long-term capital gain, $25,000 ordinary income.

D. $93,750 long-term capital gain, $31,250 exempt interest.

77. The Suarez Trust generated distributable net income (DNI) this year of $150,000, two-thirds of which was

portfolio income, and the balance of which was exempt interest. Under the terms of the trust, Clara Suarez is to

receive an annual income distribution of $30,000. At the discretion of the trustee, additional distributions can be

made to Clara or to Clark Suarez III. This year, the trustees distributions to Clara totaled $60,000. Clark received $90,000. How much of the trusts DNI is assigned to Clara? A. $75,000.

B. $60,000.

C. $45,000.

D. $30,000.

78. The Suarez Trust generated distributable net income (DNI) this year of $150,000, two-thirds of which was

portfolio income, and the balance of which was exempt interest. Under the terms of the trust, Clara Suarez is to

receive an annual income distribution of $30,000. At the discretion of the trustee, additional distributions can be

made to Clara, or to Clark Suarez III. This year, the trustees distributions to Clara totaled $60,000. Clark received $90,000. How much of the trusts DNI is assigned to Clark? A. $0, only first-tier distributions are subject to Federal income tax.

B. $60,000.

C. $75,000.

D. $90,000.

79. To reduce trustee commissions, the Sigrid Trust is operated as though it were two trusts (i.e., with

70-year-old Grandma and 7-year old Skippy each holding equal shares). This year the trust generated

distributable net income (DNI) of $80,000. The Sigrid trustee distributed $100,000 to Grandma this year:

$40,000 as her one-half share of the entitys income, and $60,000 as a distribution of principal. Skippy received no distribution. How much of the years distributable net income is assigned to Grandma? A. $40,000.

B. $50,000.

C. $80,000.

D. $100,000.

80. The Willis Trust instrument provides that Tamara, the sole income beneficiary, is to receive $40,000

annually. If trust accounting income is not sufficient to pay this amount, the Willis trustee is empowered to

invade corpus to the extent necessary. During the current year, the trust reports distributable net income (DNI)

of $100,000, including $30,000 of net tax-exempt interest. In accordance with the trust instrument, $40,000 is

paid to Tamara. What is Tamaras gross income from Exeter for the current year? A. $100,000.

B. $70,000.

C. $40,000.

D. $28,000.

81. Which of the following restrictions applies concerning distributions to trust beneficiaries?

A. Special allocations are not allowed under Subchapter J.

B. Special allocations are allowed, but only in the trusts termination year. C. Special allocations are allowed, but only for portfolio income items.

D. Special allocations of income types are allowed, assuming that they carry substantial economic effect.

82. The Testa Trust was terminated this year and Chip, the beneficiary of the corpus, received all of the trust

assets. The trust reported a $10,000 net operating loss; this was the only tax year in which the trust operated a

business. Testa has one income beneficiary, Flo. As a result of these transactions:

A. Flo and Chip each report a $5,000 NOL on their Forms 1040.

B. Chip claims the $10,000 NOL on his Form 1040.

C. Flo claims the $10,000 NOL on her Form 1040.

D. The $10,000 NOL is lost forever.

83. With respect to a timely filed Form 1041 for a trust based in Delaware, the IRS will accept:

A. Only paper returns.

B. Only e-filed returns.

C. Returns either on paper or in electronic form.

D. Returns only at its Ogden, Utah office.

84. The Taft Estate was established when Winnie Taft died on March 1, 2012. It selects a fiscal Federal income

tax year that ends on October 31. For which tax year ending October 31 must Taft begin to make quarterly

estimated Federal income tax payments?

A. 2012.

B. 2013.

C. 2014.

D. Fiduciary entities are not required to make quarterly estimated tax payments.

85. Jose is subject to the top marginal Federal income tax rates. Carlita is considering establishing a trust in

which Jose would be an income beneficiary. Considering only income tax consequences, Jose should be

designated as:

A. A first-tier beneficiary.

B. A second-tier beneficiary.

C. Only a remainder beneficiary.

D. Both a first- and a second-tier beneficiary.

86. The Drabb Trust owns a plot of business-related land, basis of $50,000, fair market value of $35,000. Drabb

is subject to a 35% marginal income tax rate. Its sole beneficiary, Eddie, is subject to a 15% marginal income

tax rate. Drabbs current-year distributable net income is $95,000. What is the most preferable action for the trustee of Drabb to take, considering only the related tax consequences?

A. Distribute the land to Eddie and make a 643(e) election.

B. Distribute the land to Eddie and make no 643(e) election.

C. Sell the land to a third party.

D. Neither sell nor distribute the land.

87. A living trust is a revocable entity that is used to avoid ____________________ proceedings upon the death

of the grantor.

________________________________________

88. The grantor of a trust generally designates both ____________________ and ____________________

beneficiaries under the controlling agreement.

________________________________________

89. In computing the Federal taxable income of a trust, the ____________________ (first, last) step is to

determine its fiduciary accounting income.

________________________________________

90. In computing the Federal taxable income of a trust, a modified ____________________ approach is used.

________________________________________

91. Under the Federal income tax rules for trusts and estates, a(n) ____________________ generally must use a

calendar tax year, but a(n) ____________________ can select any tax year-end.

________________________________________

92. Every simple trust is allowed a $____________________ personal exemption.

________________________________________

93. An estate ____________________ (can/cannot) be liable for a Federal alternative minimum tax.

________________________________________

94. A fiduciary entity computes its alternative minimum tax in a manner similar to that used for a(n)

____________________.

________________________________________

95. The trust usually makes a distribution to the income beneficiaries in the amount of its fiduciary

____________________ income.

________________________________________

96. Generally, an estates taxable income is computed in a manner similar to that used for a(n) ____________________.

________________________________________

97. Entity accounting income is controlled by the terms of the ____________________ for an estate or the

____________________ for a trust.

________________________________________

98. The trust instrument indicates whether cost recovery is ____________________ to fiduciary accounting

income, thereby reducing the amount of the distribution to the income beneficiary.

________________________________________

99. The interest income of a trust usually is allocable to ____________________ (income, remainder)

beneficiaries.

________________________________________

100. The rental income of a trust usually is allocable to ____________________ (income, remainder)

beneficiaries.

________________________________________

101. When a beneficiary receives a distribution from a trust of an asset other than cash, generally a(n)

____________________ basis is assigned to the asset.

________________________________________

102. When a beneficiary receives a distribution from a trust of an asset other than cash, the realized loss

generally is ____________________ (recognized, not recognized) by the trust.

________________________________________

103. A fiduciarys cost recovery deductions are assigned corresponding to the disposition of entity ____________________ income for the year.

________________________________________

104. A gift to charity from its 2013 income is deductible on an estates Form 1041 if it is made by the end of the ____________________ (2013, 2014) tax year.

________________________________________

105. The deduction for the Sharma Trusts $100,000 gift to charity is ____________________ when one-third of Sharmas accounting income for the tax year constitutes exempt interest income. ________________________________________

106. Distributable net income (DNI) is the ____________________ (maximum, minimum) amount that can be

included in the beneficiaries gross incomes from the fiduciary for the year. ________________________________________

107. A fiduciary assigns its tax credits to beneficiaries corresponding to the disposition of its

____________________ income for the year.

________________________________________

108. A ____________________ (first, second, third) tier distribution is one that the trust agreement requires to

be made by the trustee to the income beneficiary.

________________________________________

109. A single trust that is operated independently for each of its three beneficiaries might be taxed using the

____________________ rule.

________________________________________

110. Income beneficiary Molly wants to receive all of the municipal bond interest income of the Brenner

Trust. A special allocation of this sort must be supported by a non-tax ____________________.

________________________________________

111. Remainder beneficiary Shelley receives a $50,000 net operating loss carryover when the Malone Trust

terminates. Shelley deducts this amount ____________________ (for/from) AGI on her Form 1040.

________________________________________

112. A Form 1041 must be filed by a trust that recognizes $____________________or more gross income for

the tax year.

________________________________________

113. The Form 1041 of a calendar-year trust is due on ____________________ 15.

________________________________________

114. The IRS encourages ____________________ filing for Forms 1041.

________________________________________

115. Beneficiary information concerning a trusts income and distributions are conveyed on Schedule ____________________ of the Form 1041.

________________________________________

116. Beginning with its ____________________ tax year, an estate must remit quarterly Federal estimated

income tax payments.

________________________________________

117. The Prasad Trust incurred the following items this year.

Taxable interest income $50,000

Tax-exempt interest income, not on private activity bonds 25,000

Tax-exempt interest income, on private activity bonds 5,000

Compute Prasads tentative minimum tax for the year. Prasad does not hold any credits available to reduce the AMT liability.

118. The Kapoor Trust is your client. Complete the chart below, indicating Kapoors trust accounting income for each of the alternatives.

Interest income, taxable $60,000

Interest income, tax-exempt 30,000

Interest income, tax-exempt but AMT preference 10,000

Long-term capital gain 40,000

Trustee fee 5,000

Trust agreement provisions Trust accounting income

Fees and capital gains allocable to corpus ______________________

Capital gains allocable to corpus, one-half of fees allocable to income

______________________

Capital gains allocable to income, silent concerning allocation of fees

______________________

Fees and exempt income allocable to corpus, silent concerning allocation

of capital gain/loss

______________________

119. Reggie is one of the income beneficiaries of the LaQuanda Estate, which is subject to a 35% marginal

Federal estate tax rate, a 35% marginal Federal income tax rate, and a 10% marginal state income tax rate. This

year, Reggie received all of the sales commissions that were earned and payable to Lulu LaQuanda (cash basis)

at her death. Compute Reggies 691(c) deduction for the current year, given the following data.

Sales commissions receivable $50,000

Deferred gain on installment sale, three payments to be received, starting next year 20,000

120. The Raja Trust operates a welding business. Its current-year cost recovery deductions properly amount to

$75,000. Rajas accounting income was $100,000, of which $40,000 was distributed to first-tier beneficiary Chuck, $25,000 was distributed to second-tier beneficiary Ruby, and $35,000 was accumulated by the trustee.

Ruby also received a $25,000 discretionary corpus distribution. Rajas DNI was $80,000. Identify the treatment of Rajas cost recovery deductions.

121. Counsell is a simple trust that correctly uses the calendar year for tax purposes. Its income beneficiaries

(Kathie, Lynn, Mark, and Norelle) are entitled to the trusts annual accounting income in shares of one-fourth each. For the current calendar year, the trust has ordinary business income of $40,000, a long-term capital gain

of $20,000 (allocable to corpus), and a trustee commission expense of $4,000 (allocable to corpus). Use the

format of Figure 28.3 in the text to address the following items.

a. How much income is each beneficiary entitled to receive?

b. What is the trusts DNI?

c. What is the trusts taxable income?

d. How much is taxed to each of the beneficiaries?

122. Counsell is a simple trust that correctly uses the calendar year for tax purposes. Its income beneficiaries

(Kathie, Lynn, Mark, and Norelle) are entitled to the trusts annual accounting income in shares of one-fourth each. For the current calendar year, the trust has ordinary business income of $40,000, a long-term capital gain

of $20,000 (allocable to income), and a trustee commission expense of $4,000 (allocable to corpus). Use the

format of Figure 28.3 in the text to address the following items.

a. How much income is each beneficiary entitled to receive?

b. What is the trusts DNI?

c. What is the trusts taxable income?

d. How much is taxed to each of the beneficiaries?

123. The Gomez Trust is required to distribute $80,000 annually, split equally between its two income

beneficiaries, Lara and Byron. If trust income is not sufficient to pay these amounts, the trustee can invade

corpus to the extent necessary. During the current year, the trust has DNI of $60,000. Byron receives an

additional $30,000 discretionary corpus distribution.

a. How much of the $40,000 distributed to Lara is included in her gross income?

b. How much of the $70,000 distributed to Byron is included in his gross income?

c. How much of these distributions are first-tier or second-tier?

124. The Willa estate reports $100,000 DNI, composed of $50,000 dividends, $20,000 taxable interest, $10,000

passive income, and $20,000 tax-exempt interest. Willas two noncharitable income beneficiaries, Shanna and Tom, receive distributions of $75,000 each. How much of each class of income is deemed to have been

distributed to Shanna? To Tom? Use the following template to structure your answer.

Beneficiary Amount

Received

DNI, Income Type Corpus,

Non-taxable

Dividends Taxable

Interest

Passive Exempt

Interest

Shanna

Tom

Totals in DNI

125. The trustee of the Miguel Trust can distribute any amount of accounting income and corpus to the trusts income beneficiaries, Paula and George. This year, the trust incurred the following.

Taxable interest income $40,000

Tax-exempt interest income 20,000

Long-term capital gainsallocable to corpus 10,000 Fiduciarys feesallocable to corpus 6,000

The trustee distributed $40,000 to Paula and $40,000 to George.

a. What is Miguels trust accounting income?

b. What is Miguels DNI?

c. What is Miguels taxable income?

d. How much gross income is recognized by each of the beneficiaries?

126. The Yan Estate is your client, as are many of the decedents family members. Determine the tax effects of the indicated losses for the Yan Estate for both tax years. The estate holds a variety of investment assets, which

it received from the decedent, Mrs. Yan. The estates sole income and remainder beneficiary is Yan, Jr.

Tax Year Loss Generated

2013 (first tax year) Taxable income ($300)

Capital loss ($20,000)

2014 (final tax year) Taxable income ($40,000)

127. The Federal income taxation of a trust or estate has been described as a modified passthrough system. Compare fiduciary tax rules to those that apply to LLCs. To individuals.

128. List at least three non-tax reasons that you might suggest to your client Connie that she should consider

shifting some income and assets to a trust.

129. Identify the parties that are present when an estate is created, and their key duties. Then do the same for a

trust.

130. Tax professionals use the terms simple trust and complex trust when dealing with fiduciary

arrangements. How does one know whether a trust is simple or complex? When is this determination made?

131. Summarize the Federal income tax rules that apply to a trust or estate concerning the alternative minimum

tax. Include comments about the applicable tax rates, and any personal exemption.

132. Consider the term fiduciary accounting income as it is used with respect to the Federal income taxation of

trusts and estates. How is this amount computed? Where is it used in computing the parties taxable incomes?

133. The Moot Trust distributes an asset to its income beneficiary that shows a realized gain. What are the

Federal income tax consequences of the distribution? What if the asset shows a realized loss?

134. The Gibson Estate is responsible for collecting outstanding income amounts and paying the remaining

obligations of Juanita Gibson, the deceased. How does Federal income tax law treat these

items? Hint: Define and use the term income in respect of a decedent in your answer.

135. The Circle Trust reports some exempt interest income for the year. How does this investment income

affect Circles deduction of its fiduciary fees? Charitable contributions?

136. The DaSinzi Estate has two equal income beneficiaries (Rollo and Luisa) and one remainder beneficiary

(Coco). The estate operates a business and generates cost recovery deductions. Which taxpayer(s), if any, can

deduct these items, e.g., the deceased, the estate, Rollo, Luisa, or Coco?

137. Consider the term distributable net income as it is used with respect to the Federal income taxation of

trusts and estates. How is this amount computed? Where is it used in computing the parties taxable incomes?

138. Does the estate or trusts distributable net income always equal its deduction for distributions to beneficiaries? Are the two amounts ever equal in amount? Answer for estates, simple trusts, and complex

trusts.

139. The Yeoman Trust has generated several Federal income tax credits for this tax year. Which taxpayer(s),

if any, can use these credits in computing a Federal income tax liability, e.g., the grantor, the trust, its income

beneficiaries, its remainder beneficiaries? Answer for estates, simple trusts, and complex trusts.

140. List the three major functions of distributable net income (DNI) as that amount is used under Federal

income tax law.

141. Your client Pryce is one of the income beneficiaries of the Santiago Trust. Pryce says to you, I want all of the exempt interest income from Santiago to be allocated to me, as I am the income beneficiary who is

subject to the highest marginal Federal income tax rate. How do you respond to Pryces request?

142. When the Holloway Trust terminated this year, it held a $1 million NOL carryforward. How is the loss

carryforward treated? Does it expire with the trust or can another taxpayer use it? Be specific.

143. You are responsible for the Federal income tax filings of the Tyrone Trust. Summarize the relevant due

dates and filing requirements for Tyrone.

144. Your client Ming is a complex trust that operates exclusively in the U.S. Make a list of five or more tax

planning opportunities that you might suggest to Ming.

COMPREHENSIVE VOLUME--CHAPTER 28--INCOME

TAXATION OF TRUSTS AND ESTATES Key

1. FALSE

2. TRUE

3. TRUE

4. TRUE

5. TRUE

6. TRUE

7. TRUE

8. FALSE

9. FALSE

10. TRUE

11. FALSE

12. TRUE

13. FALSE

14. TRUE

15. FALSE

16. TRUE

17. TRUE

18. FALSE

19. TRUE

20. TRUE

21. FALSE

22. TRUE

23. TRUE

24. FALSE

25. FALSE

26. TRUE

27. FALSE

28. TRUE

29. FALSE

30. TRUE

31. FALSE

32. TRUE

33. FALSE

34. TRUE

35. FALSE

36. FALSE

37. TRUE

38. FALSE

39. TRUE

40. TRUE

41. FALSE

42. TRUE

43. TRUE

44. TRUE

45. TRUE

46. B

47. E

48. B

49. D

50. D

51. A

52. D

53. C

54. D

55. C

56. C

57. B

58. D

59. A

60. B

61. B

62. B

63. D

64. D

65. C

66. C

67. C

68. B

69. C

70. B

71. C

72. B

73. B

74. D

75. B

76. A

77. B

78. D

79. A

80. D

81. D

82. B

83. C

84. C

85. B

86. C

87. probate

88. income, remainder or remainder, income

89. first

90. flowthrough or passthrough

91. trust, estate

92. 300

93. can

94. individual

95. accounting

96. individual

97. will, trust agreement

98. allocated

99. income

100. income

101. carryover

102. not recognized

103. accounting

104. 2014

105. $66,667

106. maximum

107. fiduciary accounting

108. first or 1st

109. separate share

110. economic effect

111. for

112. 0 or zero

113. April

114. electronic

115. K-1

116. third or 3rd

117.

AMT income ($50,000 + $5,000) $55,000

AMT exemption (22,500)

AMT tax base $32,500

Tentative minimum tax ($32,500 .26) $ 8,450

Estimated tax payments of a beneficiary entity include any anticipated AMT liability.

118.

Trust agreement provisions Trust accounting income

Fees and capital gains allocable to corpus

$100,000 ($60,000 + $30,000 + $10,000)

Capital gains allocable to corpus, one-half of fees allocable to income $97,500 [($60,000 + $30,000 + $10,000) ($5,000 1/2)]

Capital gains allocable to income, silent concerning allocation of fees $137,500. Most state laws allocate fees one-half to corpus, one-half to

income. [($60,000 + $30,000 + $10,000 + $40,000) ($5,000 1/2)]

Fees and exempt income allocable to corpus, silent concerning

allocation of capital gain/loss

$60,000. Most state laws allocate capital gain/loss to corpus. No

distinction is made between AMT and non-AMT exempt interest in the

document, although such a provision would be allowed.

119. $70,000 income receivable (IRD)

$7,000 attributable state income tax (deduction in respect of a decedent, 10% $70,000) = Net IRD $63,000

Federal estate tax on net IRD = aggregate 691(c) deduction = $22,050 ($63,000 35% Federal estate tax rate).

($50,000 IRD received $70,000 total gross IRD items) $22,050 aggregate 691(c) deduction

= Reggies current-year 691(c) deduction $15,750.

Reggie claims this amount as a miscellaneous itemized deduction, not subject to the 2% of AGI floor.

120. The Raja Trusts cost recovery deductions follow the disposition of its current-year accounting income (not DNI or total distributions). Thus,

Chuck can deduct $30,000 in this regard [$75,000 ($40,000 $100,000)]. Similarly, Ruby can deduct $18,750, and Raja can deduct $26,250.

Irrelevant to this computation are (1) the first-tier or second-tier status of the beneficiaries distributions, (2) Rubys corpus distribution, and (3) the trusts allocation of cost recovery to income or to corpus.

121.

a. $10,000 (1/4 of $40,000 accounting income).

b. $36,000.

c. $19,700.

d. $9,000 (1/4 of $36,000).

Item

Totals

Accounting

Income

Taxable Income

Distributable Net

Income/

Distribution

Deduction

Ordinary income $40,000 $40,000 $40,000

Net long-term capital gain 20,000 20,000

Fiduciary fees 4,000 (4,000)

Personal exemption (300)

Accounting Income/Taxable

Income Before the

Distributions Deduction

$40,000

STEP 1

$55,700

STEP 2

$55,700

Exemption 300

Corpus Capital Gain/Loss (20,000)

Net Exempt Income

Distributable Net Income $36,000

Distribution Deduction (36,000)w

STEP 3

Entity Taxable Income $19,700n

STEP 4

w Lesser of DNI ($36,000) or actual distribution ($40,000).

n PROOF: The trust is taxed on its $20,000 capital gain, less the personal exemption.

122.

a. $15,000 (1/4 of $60,000 accounting income).

b. $56,000.

c. ($300).

d. $14,000 (1/4 of $56,000 DNI).

Item

Totals

Accounting

Income

Taxable Income

Distributable Net

Income/

Distribution

Deduction

Ordinary income $40,000 $40,000 $40,000

Net long-term capital gain 20,000 20,000 20,000

Fiduciary fees 4,000 (4,000)



Income Before the


$60,000

STEP 1

$55,700

STEP 2

$55,700

Exemption 300

Corpus Capital Gain/Loss

Net Exempt Income


Distribution Deduction (56,000)w

STEP 3

Entity Taxable Income ($ 300)

STEP 4

wLesser of DNI ($56,000) or actual distribution ($60,000).

123.

a. $30,000, one-half of DNI.

b. $30,000.

c. First-tier of $30,000 to both beneficiaries. First-tier distributions are those distributions which are composed of trust accounting income

that is required to be distributed currently.

There are no second-tier distributions. The tier system only accounts for the annual DNI amounts, and all of the $60,000 DNI is distributed

on the first tier.

124.

Beneficiary Amount

Received

DNI, Income Type Corpus,

Non-taxable

Dividends Taxable

Interest

Passive Exempt

Interest

Shanna $75,000 $25,000 $10,000 $5,000 $10,000 $25,000

Tom $75,000 $25,000 $10,000 $5,000 $10,000 $25,000

Totals in DNI $50,000 $20,000 $10,000 $20,000 $50,000

125.

a. $60,000.

b. $54,000.

c. $9,900.

d. $18,000 taxable interest income to both.

Item

Totals

Accounting

Income

Taxable Income

Distributable Net

Income/

Distribution

Deduction

Taxable interest income $40,000 $40,000 $40,000

Exempt interest income 20,000 20,000

Net long-term capital gain 10,000 10,000

Fiduciary fees 6,000 (4,000)*



Income Before the


$60,000

STEP 1

$45,900

STEP 2

$45,900

Exemption 100

Corpus Capital Gain/Loss (10,000)

Net Exempt Income 18,000**


Distribution Deduction (36,000)

STEP 3

Entity Taxable Income $ 9,900

STEP 4

* 40/60 $6,000

** $20,000 $2,000 (disallowed fees)

Lesser of total distributions ($80,000) or deductible portion of DNI ($54,000 $18,000 = $36,000).

Corpus LTCG $10,000 exemption $100.

Beneficiary Amount Received Income Type [Step 5]

Taxable Interest Exempt Interest

Paula $40,000 $18,000* $9,000

George $40,000 $18,000 $9,000

Totals in DNI $36,000 $18,000

* ($40,000 distribution $80,000 total second-tier distributions) $36,000 taxable interest in DNI (assigning the fiduciary fees proportionately to the two types of income).

126.

2013 No flow-through of either the negative taxable income or the capital loss incurred. The $300 negative taxable income, due solely to

the entitys personal exemption, is lost forever, while the unused capital loss carries forward indefinitely.

2014 Flow-through of $40,000 negative taxable income, deductible by Yan, Jr., as a miscellaneous itemized deduction, subject to the 2%

of AGI floor.

Flow-through to Yan, Jr., of the $20,000 net capital loss carryforward from 2013, to be netted against Juniors own capital gain income, without any expiration date for Juniors returns.

127. Fiduciary entities are taxed in a unique fashion under Subchapter J of the Code. Although the passthrough concept (similar to partnerships,

LLCs, and S corporations) generally is used, the fiduciary also is a separate taxable entity. But the concept of distributable net income echoes that of

the C corporation tax structure. By this means, double taxation is avoided by allowing a deduction for certain payments to beneficiaries. The tier

system in accounting for distributions is unique and does not have comparable use elsewhere in the Code.

128. Trusts often are used to shift management responsibilities for assets (e.g., in saving for college or retirement, or to protect against medical

difficulties). Fiduciary entities can be used by politicians, divorcing couples, liquidating or bankrupt corporations, and by those executing an estate

plan. Trusts also are attractive vehicles for holding special-use assets, such as life insurance policies and investment portfolios.

129. An estate of a decedent is created either by law or by will. The executor manages the decedents assets and satisfies any obligations. Distributions are made to income beneficiaries. When the estate terminates, the corpus is distributed to the remainder beneficiaries.

A trust is created when the grantor transfers assets to the trustee, who takes titles to the assets so assigned. The trustee manages the corpus, making

distributions to the income beneficiaries. When the trust terminates, the corpus is distributed to the remainder beneficiaries.

130. Under the rules of Subchapter J, a simple trust (1) must distribute it entire accounting income every year, (2) have no charitable beneficiaries,

and (3) distribute no corpus.

A complex trust is one that is not a simple trust. The classification as simple or complex is made every year.

131. An estate or trust is subject to the alternative minimum tax (AMT) if it reports sufficient preference and adjustment items. Any AMT liability

must be paid through the fiduciarys estimated tax payments.

There is no ACE adjustment for fiduciaries, but the entity is allowed a $22,500 personal exemption in computing AMT income. The exemption is

phased out beginning when AMTI exceeds $75,000. Applicable tax rates are 26% on the first $175,000 of AMTI, and 28% thereafter.

132. Entity accounting income is computed using state fiduciary laws and GAAP, to comply with the specifications of the will or trust agreement.

Accounting income is the first computation needed in deriving DNI and the taxable income of the entity.

The Uniform Principal and Income Act (last major revision in 1997) provides common rules for the states to adopt in characterizing entity accounting

income. Generally, operating and investment income is allocated to income beneficiaries, capital gain/loss and cost recovery is allocated to corpus,

and fiduciary fees are split equally between the two.

133. By default (i.e., no election is made), an in-kind distribution is not a taxable event for the fiduciary. The beneficiary takes a carryover basis in

the asset received. By election, however, the fiduciary can recognize the realized gain or loss on the date of the distribution. But if the related party

rules apply, the recognition of any loss may be deferred.

134. Income in respect of a decedent (IRD) exists when a fiduciary or beneficiary receives an item that was earned but not recognized as gross

income during the lifetime of the decedent. In general, IRD is treated in the following fashion.

IRD is included in the gross estate, and in the gross income of the ultimate recipient.

There is no step-up or step-down of the basis of an IRD item.

Expenses related to generating the IRD are deductible by the recipient, and by the gross estate.

Any AMT preference and adjustment the IRD would have generated for the decedent is carried over to the recipient.

135. A proportionate amount of the deduction for the fees and contributions is disallowed in computing entity taxable income. The disallowed

portion of the deduction is the amount paid or accrued times the following fraction.

Exempt items of entity accounting income

Total accounting income

An exception can apply to the contribution deduction. If the will or trust agreement specifies that the charitable gift must be made from a taxable

income source, the full deduction is allowed.

136. If the fiduciary entity is operating a trade or business, or holds investment property that generates cost recovery deductions, those deductions are

allocated among the recipients of entity accounting income. If any accounting income is retained by the entity, therefore, it can claim an allocable

portion of the cost recovery deductions.

137. Distributable net income for any taxable year means the taxable income before the distribution deduction of the estate or trust adjusted for the

following.

+ the personal exemption

corpus capital gains

+ corpus capital losses

+ Net tax-exempt interest

Reg. 1.643(a)-0 states that the term distributable net income has no application except in the taxation of estates and trusts and their beneficiaries.

DNI limits the deductions allowable to estates and trusts for amounts paid, credited, or required to be distributed to beneficiaries, and it is used to

determine how much of an amount paid, credited, or required to be distributed to a beneficiary is includible in his or her gross income. DNI also is

used to determine the character of distributions to the beneficiaries.

138. The distribution deduction for an estate or complex trust equals the deductible portion of DNI (i.e., after removing any net tax-exempt income)

or the taxable amount that actually was distributed to beneficiaries during the tax year. For a simple trust, a full distribution of DNI is assumed, even

if actual asset distributions have not yet been made.

139. A simple trust does not claim any tax credits. An estate or complex trust claims a tax credit in proportion to the entity accounting income that it

has retained. The entitys beneficiaries similarly claim tax credits in proportion to the entity accounting income that they were assigned for the tax year.

140.

DNI determines the maximum amount that can be taxed to the beneficiaries for the tax year.

The make-up of DNI carries through to the beneficiaries, e.g., if DNI is constituted of 25% dividend income, each beneficiarys distribution also is accounted for as 25% dividend income.

DNI is used to compute the distribution deduction for the entity.

141. Special allocations of DNI are allowed only rarely under Subchapter J. A special allocation must be required in the trust instrument and

supported by an economic effect that is independent of cash-flow and income tax consequences. This rule is similar to that used in partnership

taxation under 704(b)(2). Lacking such economic effects, all income beneficiaries share proportionately the character of the DNI.

142. In the year in which a fiduciary entity terminates, the remainder beneficiaries take over any loss and credit carryforwards. Also, the loss

carryforward period does not start over, but the beneficiaries can use only the carryforward years remaining. Beneficiaries who are individuals claim

these NOL deductions for AGI, and other entities use them to offset ordinary business income.

143. A Form 1041 is required if the estate or trust recognizes at least $600 gross income, or if a trust has a positive amount of taxable income. The

return and any amount of tax due is due, before extensions, no later than the fifteenth day of the fourth month following the end of the tax year; for a

calendar taxpayer, this is April 15.

Estimated tax payments must be made by a fiduciary entity. Charitable trusts and private foundations need not make estimated payments. Estates

and grantor trusts need make estimated payments only beginning with the tax year that includes the date two years after the date of the decedents death.

144. Where fiduciary entities are used to shift income among taxpayers, the following planning objectives should be kept in mind.

Sprinkling trusts allow flexibility for the trustee to direct income in a tax-wise manner.

High-income and high-wealth taxpayers usually should be given second-tier beneficiary status.

Income shifting goals are limited by the fiduciarys high marginal tax rates, and by the kiddie tax.

Trust vehicles should be restricted to cases where professional management will produce asset returns sufficient to justify the associated

administrative costs.

Where investments in exempt securities are attractive, direct ownership rather than trustee control may be preferable, so that the 103

exclusion can be retained by the grantor.

Fiduciaries can be liable for an alternative minimum tax.

Entity termination dates should be chosen so as to maximize fiduciary deductions, but not to bunch beneficiary income recognition.

The 65-day rule can be useful in accounting for year-end distributions.

Fiduciary expenses generally should be claimed by the taxpayer who is subject to the highest marginal income tax rate.

ch28

Documents

fiduciary income

income beneficiary

decedents income

income distributions

federal income tax deductions

income beneficiaries

example of income

estates income tax return