INCOME TAXATION OF TRUSTS AND ESTATES

CLASS PROBLEM #2

2. In each of the following questions assume that all parties are on the cash basis calendar year method of accounting.  The year involved is 2005. Also assume that all the trust income is required to be distributed currently and that there are no charitable beneficiaries. The trustee makes distributions to the beneficiaries on the fifth day after the close of its taxable year. 

For each question determine the following amounts for the trust:

(1) Fiduciary (643(b)) income (gross and net) for accounting purposes;
(2) Federal gross income for the trust;
(3) tentative taxable income of the trust (taxable income exclusive of the distributions deduction);
(4) distributable net income of the trust;
(5) trust 651 distribution deduction;
(6) the taxable income of the trust.  

For the beneficiaries, determine:

(1) amount potentially includible in gross income under 652 (a);
(2) the character of those amounts; and
(3) the net income taxable to the beneficiaries.

(a) Trust received:  $10,000 dividends and $1,000 interest.  The trust provided that all income was to be paid equally "to my nephew's children." The nephew had children A and B.

(b) A trust that is required to distribute all of its income annually has the following receipts::

Cash dividends from shares of IBM	$50,000
Interest on Chrysler bonds	$30,000
Rent received for the use of Blackacre	$20,000

The trust has the following expenses:

Trustee fee on corpus	$1,000
Trustee fee on income	$1,000
Local property taxes, allocable to income	$15,000

(c) A trust that is required to distribute all of its income annually has the following receipts::

Capital gains from shares of IBM	$50,000
Interest on Chrysler bonds	$30,000
Rent received for the use of Blackacre	$20,000

The trust has the following expenses:

Trustee fee on corpus	$1,000
Trustee fee on income	$1,000
Local property taxes, allocable to income	$15,000

(d) Same as (c), except all $2,000 of the trustee fee is allocable to fiduciary accounting income.

(e) Trust received: Taxable Interest of $9,000 and Tax-exempt Interest of $1,000. Trustee incurred $100 in interest expense on a loan to purchase the tax-exempt bonds (allocable to income). B is the sole income beneficiary.

(f) Trust received: Taxable Interest of $7,000 and Tax-exempt Interest of $3,000. Trustee paid trustee's commissions of $1,000 (allocable to income). A and B are equal income beneficiaries.

(g) Trust received: Rents of $5,000; dividends $1,000, and depreciation on rental property $1,000 (the trust agreement provides that the trustee shall not maintain a depreciation reserve). B is sole income beneficiary.

(i) What if the trust instrument required the trustee to retain a reserve for depreciation of $1,000 per year and the trustee maintained such a reserve?

(ii) What if the trust also had a casualty loss to rental property (not compensated for by insurance) of $1,000 (allocable to corpus)?