The trustee reports

Chapter20

Problem

(pg. 20-36) Ques – *22, 23, 24, *27, *29, *30, *31, 32, *33, *34, 35, 38, 39. (13)

22. LO.1 The trustee reports thefollowing transactions for the 2011 tax year. The trustee accumulates all accountingincome for the year.Compute the Federal income tax liability for the Kim Trust.

Operating income from a business $400,000

Dividend income, all from U.S. corporations 70,000

Interest income, City of San Antonio bonds 40,000

Fiduciary fees, deductible portion (20,000)

Net rental losses, passive activity (100,000)

p. 20-7

23. LO.1 The Purple Trust incurred the following items this year:

Taxable interest income $75,000

Tax-exempt interest income, not on private activity bonds 60,000

Tax-exempt interest income, on private activity bonds

(notissued during 2009 or 2010) 25,000

Compute Purple’s tentative minimum tax for the year. Purple does not have any creditsavailable to reduce theAlternative Minimum Tax (AMT) liability.

24. LO.2 The Grouper Trust will incur the following items next year, its first year ofexistence:

Interest income $ 75,000

Rent income 100,000

Cost recovery deductions for

therental activity 15,000

Capital gain income 60,000

Fiduciary and tax preparation fees 11,000

Betty, the grantor of the trust, is working with you on the language in the trust instrumentrelative to the derivation of annual accounting income for the entity. She will nameShirley as the sole income beneficiary and Benny as the remainder beneficiary.

a. Suggest language to Betty that will maximize the annual income distribution toShirley.

b. Suggest language to Betty that will minimize the annual distribution to Shirley andmaximize the accumulation on Benny’s behalf.

27. LO.2 Roberto is one of the income beneficiaries of the Carol LeMans Estate. This year, asdirected by the will, Roberto received all of the sales commissions that were earned andpayable to Carol (cash basis) at her death, as well as one of three remaining installmentpayments. Compute Roberto’s gross income attributable to Carol’s activities for thecurrent year, given the following financial data:

Sales commissions receivable $60,000

Total ordinary gain on installment sale,

twopayments remaining after this year 50,000

 

29. LO.2 The Oliver Trust has generated $50,000 in depreciation deductions for the year. Itsaccounting income is $25,000. In computing this amount, pursuant to the trustdocument, depreciation was allocated to corpus. Accounting income was distributed atthe trustee’s discretion: $20,000 to Hernandez and $5,000 to Jackson.

a. Compute the depreciation deductions that Hernandez, Jackson, and Oliver may claim.

b. Same as (a), except that depreciation was allocated to income.

c. Same as (a), except that the trustee distributed $10,000 each to Hernandez and toJackson and retained the remaining accounting income.

d. Same as (a) , except that Oliver is an estate (and not a trust) .

30. LO.2, 3 The Ricardo Trust is a simple trust that correctly uses the calendar year for taxpurposes. Its income beneficiaries (Lucy and Ethel) are entitled to the trust’s annualaccounting income in shares of one-half each. For the current calendar year, the trustgenerates ordinary income of $50,000, a long-term capital gain of $25,000 (allocable tocorpus), and a trustee commission expense of $10,000 (allocable to corpus) . Use theformat of Figure 20.3 to address the following items.

Item Totals Accounting Income Taxable Income Distributable Net Income/ Distribution Deduction
Ordinary income $50,000 $50,000
Net long-term capital gain 25,000
Fiduciary fees 10,000
Personal exemption
Accounting Income/Taxable Income Before the Distributions Deduction
Exemption
Corpus Capital Gain/Loss
Net Exempt Income
Distributable Net Income
Distribution Deduction
Entity Taxable Income

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

b. What is the trust’sdistributable net income (DNI)?

c. What is the trust’s taxable income?

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

PROOF: The trust should be taxed on “its” $25,000 long-term capital gain less the $300 personal exemption.

Figure 20.3 and Examples 21 and 22

31. LO.2, 3 Assume the same facts as in Problem 30, except that the trust instrumentallocates the capital gain to income.

Item Totals Accounting Income Taxable Income Distributable Net Income/ Distribution Deduction
Ordinary income $50,000 $50,000
Net long-term capital gain 25,000 25,000
Fiduciary fees 10,000
Personal exemption
Accounting Income/Taxable Income Before the Distributions Deduction
Exemption
Corpus Capital Gain/Loss
Net Exempt Income
Distributable Net Income
Distribution Deduction
Entity Taxable Income

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

b. What is the trust’sdistributable net income (DNI)?

c. What is the trust’s taxable income?

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

Figure 20.3 and Examples 21 and 22

32. LO.3 Under the terms of the Lagos Trust instrument, the trustee has discretion todistribute or accumulate income on behalf of Willie, Sylvia, and Doris in equal shares.The trustee also can invade corpus for the benefit of any of the beneficiaries to the extentof each person’s respective one-third interest in the trust.In the current year, the trust has DNI of $120,000. Distribution and accumulationamounts were as follows.

-To Willie: $40,000 from DNI and $10,000 from corpus.

-To Sylvia: $25,000. The remaining $15,000 DNI is accumulated.

-To Doris: $0. The $40,000 DNI is accumulated.

a. How much income is taxed to Willie? (Hint: Apply the separate share rule.)

b. To Sylvia?

c. To Doris?

d. To Lagos?

33. LO.3 The Putnam Sisters Trust is required to distribute $60,000 annually equally to itstwo income beneficiaries, Clare and David. If trust income is not sufficient to pay theseamounts, the trustee can invade corpus to the extent necessary. During the current year,the trust generates only taxable interest income and has DNI of $150,000; the trusteedistributes $30,000 to Clare and $130,000 to David.

a. How much of the $130,000 distributed to David is included in his 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?

34. LO.3 The Dailey Estate has $100,000 of DNI, composed of $40,000 in dividends, $20,000 in taxable interest, $15,000 of passive activity income, and $25,000 in tax-exempt interest. The entity’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?

35. LO.2, 3 The trustee of the Purple Trust can distribute any amount of accounting incomeand corpus tothe trust’s beneficiaries, Lydia and Kent. This year, the trust incurred thefollowing.

Taxable interest income $40,000

Tax-exempt interest income 60,000

Long-term capital gains—allocable to corpus 30,000

Fiduciary’s fees—allocable to corpus 10,000

The trustee distributed $40,000 to Lydia and $20,000 to Kent.

a. What is Purple’s trust accounting income?

b. What is Purple’s DNI?

c. What is Purple’s taxable income?

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

Figure 20.3 and Example 31

38. 2011 No flow-through of either the negative taxable income or the capital loss incurred.

2012 Flow-through of $30,000 negative ordinary taxable income, deductible by Yellow Jr. as a miscellaneous itemized deduction, subject to the 2% of AGI floor.

Example 34

39.

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