Chapter 28 Income Taxation Of Trusts And Estates

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Problems
17. LO.1 Complete the following chart, indicating the comparative attributes of the typical simple trust and complex trust by answering yes/no or explaining the differences between the entities where appropriate.
Attribute Simple Trust Complex Trust
Trust could incur its own tax liability for the year
Trust generally distributes all of the DNI
Trust can deduct its charitable contributions in the year of, or the year after, payment
Trust could claim a foreign tax credit
Maximum tax rate on net long-term capital gains ? 20%
AMT preferences and adjustments flow through to beneficiaries ratably
Trust can adopt the FIFO method for its inventory assets; the grantor had been using lower of cost or market
Trust can use a tax year other than the calendar year
Amount of personal exemption
18. LO.2 The Polozzi Trust will incur the following items in the next tax year, its first year of existence.
Interest income $ 25,000
Rent income 100,000
Cost recovery deductions for the rental activity 35,000
Capital gain income 40,000
Fiduciary and tax preparation fees 7,000
Betty, the grantor of the trust, is working with you on the language in the trust instrument relative to the derivation of annual accounting income for the entity. She will name Shirley as the sole income beneficiary and Benny as the remainder beneficiary.
a. Suggest language to Betty that will maximize the annual income distribution to
Shirley.
b. Suggest language to Betty that will minimize the annual distribution to Shirley and maximize the accumulation on Benny’s behalf.
19. LO.2 Complete the chart below, indicating the Calvet Trust’s entity accounting income for each of the alternatives. For this purpose, use the following information.
Interest income, taxable $300,000
Interest income, tax-exempt 30,000
Interest income, tax-exempt but AMT preference item 20,000
Long-term capital gain 40,000
Trustee fee 10,000
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
20. LO.1, 2, 3 Complete the following chart, indicating the comparative attributes of the typical trust and estate by answering yes/no or explaining the differences between the entities where appropriate.
Attribute Estate Trust
Separate income tax entity
Controlling document
Can have both income and remainder beneficiaries
Computes entity accounting income before determining entity taxable income
Termination date is determinable from controlling document
Document identifies both income and remainder beneficiaries
Generally must use calendar tax year
21. LO.2 Sanchez incurred the following items.
Business income, exclusive of the following items $80,000
Tax-exempt interest income 40,000
Payment to charity from 2016 Sanchez gross income, paid 3/1/17 20,000
Complete the following chart, indicating the charitable contributions deduction under the various assumptions.
Assumption 2016 Deduction for Contribution
Sanchez is a cash basis individual.
Sanchez is an accrual basis corporation.
Sanchez is a trust.
22. LO.2, 3 The Allwardt Trust is a simple trust that correctly uses the calendar year for tax purposes. Its income beneficiaries (Lucy and Ethel) are entitled to the trust’s annual accounting income in shares of one-half each.
For the current tax year, Allwardt reports the following.
Ordinary income $100,000
Long-term capital gains, allocable to corpus 30,000
Trustee commission expense, allocable to corpus 5,000
Use the format of Exhibit 28.5 to address the following items.
a. How much income is each beneficiary entitled to receive?
b. What is the trust’s DNI?
c. What is the trust’s taxable income?
d. How much gross income is reported by each of the beneficiaries?
23. LO.2, 3 Assume the same facts as in Problem 22, except that the trust instrument allocates the capital gain to income.
a. How much income is each beneficiary entitled to receive?
b. What is the trust’s DNI?
c. What is the trust’s taxable income?
d. How much gross income is reported by each of the beneficiaries?
24. LO.3 The Kilp Sisters Trust is required to distribute $60,000 annually equally to its two income beneficiaries, Clare and Renee. 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 generates only taxable interest income and records DNI of $160,000; the trustee distributes $30,000 to Clare and $150,000 to
Renee.
a. How much of the $150,000 distributed to Renee is included in her gross income?
b. How much of the $30,000 distributed to Clare is included in her gross income?
c. Are these distributions first-tier or second-tier distributions?
25. LO.3 The Dolce Estate reports the following items for the current tax year.
Dividend income $ 50,000
Taxable interest income 8,000
Passive activity income 30,000
Tax-exempt interest income 12,000
Distributable net income $100,000
Dolce’s two noncharitable income beneficiaries, Brenda and Del, receive cash distributions of $20,000 each. How much of each class of income is deemed to have been distributed to Brenda? To Del?
26. LO.2, 3 The trustee of the Pieper Trust can distribute any amount of accounting income and corpus to the trust’s beneficiaries, Lydia and Kent. This year, the trust incurred the following.
Taxable interest income $40,000
Tax-exempt interest income 20,000
Long-term capital gains—allocable to corpus 80,000
Fiduciary’s fees—allocable to corpus 9,000
The trustee distributed $26,000 to Lydia and $13,000 to Kent.
a. What is Pieper’s trust accounting income?
b. What is Pieper’s DNI?
c. What is Pieper’s taxable income?
d. What amounts are taxed to each of the beneficiaries?
27. LO.2 Each of the following items was incurred by Jos_e, the cash basis, calendar year decedent. Under the terms of the will, Dora took immediate ownership in all of Jos_e’s assets, except the dividend-paying stock. The estate received Jos_e’s final paycheck.
Applying the rules for income and deductions in respect of a decedent, indicate on which return each item should be reported: Dora’s income tax return (Form
1040), the estate’s first income tax return (Form 1041), or the estate’s estate tax return (Form 706). More than one alternative may apply in some cases.
Item Incurred Form(s) Reported on
a. Wages, last paycheck
b. State income tax withheld on last paycheck
c. Capital gain portion of installment payment received
d. Ordinary income portion of installment payment received
e. Dividend income, record date was two days prior to Jos_e’s death
f. Unrealized appreciation on a mutual fund investment
g. Depreciation recapture accrued as of date of death
h. Medical expenses of last illness
i. Apartment building, rents accrued but not collected as of death
j. Apartment building, property tax accrued and assessed but not paid as of death