15

Income Taxation of
Estates and Trusts

Solutions to Tax Research Problems

TAX RESEARCH PROBLEMS

15-33 Reg. § 1.643(a)-3(a) provides the general rule that capital gains realized upon the sale of fiduciary assets are
normally allocated to corpus and excludable from the distributable net income of the fiduciary. However,
the regulation lists three situations in which capital gains may be included in DNI:

1. The gains are allocated to fiduciary income under the terms of the governing instrument or local law by
the fiduciary on its books or by notice to the beneficiary;
2. The gains are allocated to corpus but actually distributed to beneficiaries during the taxable year; or
3. The gains are utilized (pursuant to the terms of the governing instrument or the practice followed by
the fiduciary) in determining the amount that is distributed or required to be distributed.

Situation 1 is clearly inapplicable, based upon the fact that the trust instrument described in the research
problem specifies that capital gains realized upon the sale of trust assets are allocable to trust corpus. The
applicability of Situation 2 is discussed in Revenue Ruling 68-392, 1968-2 C.B. 284. The ruling states that
“this provision regarding the inclusion of capital gains in distributable net income applies only where there
is a distribution required by the terms of the governing instrument upon the happening of a specified
event.” For example, if the trustee of a trust containing real property is directed to hold such property
for 10 years and then sell it and distribute the proceeds to a beneficiary, the sale of the property
is a specified event, and any capital gain realized would be included in DNI for the year of sale. [See
Example (3), Reg. § 1.643(a)-3(d).]
5- Situation 3 requires that capital gains be included in DNI if they are utilized in determining the
amount that is distributed to beneficiaries. Example (1), Reg. § 1.643(a)-3(d) indicates that when a trustee
follows a regular practice of distributing the exact net proceeds from the sale of the trust assets, the capital
gains realized upon the sale will be included in DNI. Based upon the facts of the research problem, the
trustee appears to have adopted a practice of routinely distributing capital gains to beneficiary M. As a
result, the IRS certainly has an argument that Situation 3 is applicable and that the $25,000 capital gain
should be included in the trust’s DNI for the current year.

15-1
 15
Income Taxation of
Estates and Trusts

Test Bank

True or False

1. There is no statutory period after which a decedent’s estate must be terminated.

2. Both estates and trusts may pay any income tax due for a year with a timely filed return.

3. Decedent D, a calendar year taxpayer, died on October 18 of the current year. The estate of D also
must use a calendar year for income tax purposes.

4. As a general rule, tax provisions that apply to the income taxation of individuals also apply to the
income taxation of fiduciaries.

5. The standard deduction available to a fiduciary is the same amount available to a married taxpayer
filing separately.

6. Since fiduciaries are generally only managing assets and not carrying on a business, their expenses are
not deductible.

7. The Estate of X incurred administration expenses of $42,000. These expenses can be taken as an estate
tax deduction to reduce X’s taxable estate and can also be deducted for income tax purposes on the
estate income tax return.

8. On February 9, 19X2 trustee T makes a $10,000 payment to a qualified charity out of the gross
income of the Alpha trust, a calendar year taxpayer. T may elect to deduct the payment on Alpha’s
19X1 or 19X2 income tax return.

9. If a trust incurs a net operating loss or a capital loss, the trust beneficiaries may deduct the losses
under the “conduit” theory for their taxable year within which the trust year ends.

10. An executor may elect to include “income in respect of a decedent” either in the gross estate on the
Federal estate tax return or in gross income on the fiduciary Federal income tax return.

15-3
15-4 Chapter 15 Income Taxation of Estates and Trusts

11. Upon his death, individual T, a cash basis taxpayer, had an outstanding account receivable of $20,000
for services he had performed prior to death. Because of some uncertainty as to its collectability, this
receivable was valued at $15,000 for estate tax purposes. The tax basis of this asset to T’s estate is
zero.

12. A fiduciary can elect whether or not to recognize a gain for tax purposes on the distribution of
appreciated property made in fulfillment of a pecuniary bequest to a beneficiary.

13. If a fiduciary does not elect to recognize gain or loss on the distribution to a beneficiary of appreciated
or depreciated property (determined as if the property had been sold at fair market value), the
fiduciary’s tax basis in the property carries over to the beneficiary.

14. Taxable income not available for distribution to income beneficiaries may still be included in
distributable net income.

15. The categorization of a trust as “simple” or “complex” may vary from year to year.

16. Because a simple trust by definition is a trust that must distribute all income currently to beneficiaries,
a simple trust will never have an income tax liability.

17. Under the terms of the governing trust instrument, the trustee of ABC trust is required to distribute all
trust income annually to trust beneficiaries. In the current taxable year, the trust had taxable income
of $100,000. However, because of an illness late in the year, the trustee failed to make any actual cash
distributions to beneficiaries. The beneficiaries will report and pay tax on the $100,000 of current year
trust income even though no actual distribution was made.

18. Estate E has a fiscal year ending September 30 of the current year. On October 15 of the current year,
the executor distributed $10,000 out of current year income to beneficiary Q, a calendar year
taxpayer. Q will report the taxable portion of this distribution on his current year’s tax return.

19. In the current taxable year, trust beneficiary B received a distribution exceeding DNI. B will generally
not pay tax on the distribution.

20. Income accumulated in a trust for a child less than 19 is taxed at the parents’ rates and not the trust’s rates.

Multiple Choice

21. The trustee of the XYZ Trust has been selling off assets and purchasing others with the aim of
establishing a major trucking business. Besides possibly breaching his fiduciary duty to prudently
manage the trust assets, the trustee’s action may cause the IRS to
a. Characterize the trust as an association taxable as a corporation
b. Impound the trust’s assets
c. Investigate the trustee’s fitness to serve
d. Both a. and c.
22. Fiduciary accounting income is
a. Determined by reference to the governing instrument (will or trust agreement) and applicable
state law
b. The taxable DNI not distributed to beneficiaries
c. The trustee’s fee for preparation of accounting reports
d. Always inclusive of stock dividends
 Test Bank 15-5

23. F transfers $100,000 in trust to trustee T. Under the terms of the trust instrument, S (F’s son) is to
receive the income of the trust for his lifetime. Upon S’s death, the corpus will be distributed to GC,
S’s daughter. The beneficiaries of this trust are
a. S only
b. S and GC
c. T and S
d. T, S, and GC
24. For the current year, Trust J has the following receipts and expenses:

Tax-exempt interest income $12,000

Dividends from domestic, taxable corporations 15,000
Long-term capital gain (allocable to corpus under state law) 5,000
Trustee fee (equally allocable to income and
corpus under the trust instrument) (4,000)

Based on the above facts, what is the trust ’s income for fiduciary accounting purposes?
a. $23,000
b. $25,000
c. $28,000
d. $32,000
25. To determine whether capital gains are allocable to corpus, the trustee should
a. Consult the trust instrument.
b. Look to applicable state law.
c. Examine the tax consequences to the beneficiaries, and allocate to corpus only if tax results to
beneficiaries are desirable.
d. Both a. and b.
26. If the terms of a trust allocate one-third of the trustee’s fee to corpus, which of the following is true?
a. The provision is void—the corpus can never be invaded.
b. The balance is charged against income.
c. The one-third of the fee allocable to corpus is not deductible for income tax purposes.
d. The trustee will have to wait until the corpus is distributed to the remaindermen to receive this
portion of his fee.
27. Which of the following triggers the filing of Form 1041, the fiduciary income tax return?
a. An estate with annual gross income of $430.
b. A trust with annual gross income of $1,600.
c. An estate with annual gross income of $500, and with a beneficiary who is an English citizen
residing in London.
d. Both b. and c.
28. The amount of personal exemption available to a complex trust is
a. $0
b. $100
c. $300
d. $600
29. The amount of personal exemption available to a simple trust is
a. $0
b. $100
c. $300
d. $600
15-6 Chapter 15 Income Taxation of Estates and Trusts

30. In the current taxable year, Trust J has the following receipts and expenses:

Tax-exempt interest income $5,000

Taxable interest income 12,000
Rent income 8,000
Long-term capital gain allocable to corpus 25,000
Trustee fee 2,000
Rent expenses 1,100

Based on these facts, the trust may deduct

a. $2,000 trustee fee and $1,100 rent expense

b. $1,800 trustee fee and $990 rent expense
c. $1,600 trustee fee and $880 rent expense
d. $1,600 trustee fee and $1,100 rent expense
31. In the current taxable year, Trust R has the following receipts and expenses:

Tax-exempt interest income $15,000

Taxable interest income 7,000
Rent income 23,000
Long-term capital gain allocable to corpus 15,000
Trustee fee 9,200
Rent expense 12,000

During the current taxable year, the trustee made payments to charity totaling $3,000. The trust may
claim a charitable contribution deduction of

a. $0
b. $2,000
c. $2,250
d. $3,000
32. The governing instrument for Trust S provides that the trustee will establish a reserve for depreciation
of trust rental property of $10,000 per year. In the current year, Trust S’s rental property generates a
tax depreciation deduction of $18,000. During the current year, the trustee distributes 30 percent of S’s
DNI to beneficiaries. Based on these facts, Trust S may take a depreciation deduction of
a. $0
b. $12,600
c. $15,600
d. $18,000
33. Which of the following may a fiduciary not deduct?
a. Net operating loss carryforwards
b. Capital losses to the extent of capital gains
c. Current losses from passive activities to the extent of current income from passive activities
d. A casualty loss already claimed as a deduction on an estate tax return
34. D, a country doctor, died suddenly. The doctor practiced as a sole proprietor using cash basis
accounting. The decedent’s final return reported cash basis income and expenses on Schedule C (Form
1040). D’s former patients have continued to send checks in payment for services D performed. The
landlord, phone company, and other creditors of his practice have sent their bills. The administrator
of D’s estate should
a. Treat the checks as nontaxable gifts and the bills as voidable because of D’s death
b. Return the checks and bills to avoid burdening the decedent’s estate with the possible tax
consequences
c. Include the checks as income upon receipt and deduct the bills as expenses when paid on the
estate income tax return (Form 1041)
d. File an amended tax return (Form 1040X) to recognize the income and deductions to D because
the decedent’s final return must use the accrual basis
 Test Bank 15-7

35. Distributions of trust income to trust beneficiaries most resembles

a. The flow-through income to an S corporation shareholder
b. The proportionate share of income received by a partner as a share of profits
c. Gifts
d. Both a. and b
36. The executor of D’s estate, in accordance with the specific instructions of the testator, must distribute
50 percent of the income produced by the estate to A. The estate recognized $60,000 income, and the
executor distributed $25,000 and a diamond ring worth $5,000. The ring belonged to the estate and
had not been bequeathed to anyone. As a result of this distribution, A should report taxable income of
a. nothing—legacies and bequests are tax-free.
b. $25,000
c. $30,000
d. $5,000
37. During the current year, the Estate of W had taxable income of $11,000. During the year, the executor of
the estate distributed an automobile that had been owned by decedent W to W’s daughter, D. The
automobile was a specific bequest to D. The automobile had a basis to the estate of $10,000, and a fair
market value at date of distribution of $14,000. Based on these facts, D has received an income
distribution from the Estate of W of
a. $0
b. $10,000
c. $11,000
d. $14,000
38. Under the terms of Q’s will, beneficiary X was to receive a cash (pecuniary) bequest of $25,000. X
agreed to accept certain shares of corporate stock, FMV $25,000, out of the Estate of Q in satisfaction
of this bequest. The basis of the shares to the Q Estate was $21,000, the value of the shares at the date
of Q’s death. Based on these facts,
a. The Estate of Q will recognize a $4,000 gain, and X will have a $25,000 basis in the shares.
b. The Estate of Q will recognize a $4,000 gain, and X will have a $21,000 basis in the shares.
c. The Estate of Q will not recognize any gain, and X will have a $21,000 basis in the shares.
d. The Estate of Q will not recognize any gain, and X will have a $25,000 basis in the shares.
39. A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DNI) during
its current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the
remaining amount is made up of dividends. According to the trust instrument, the trustee may make
discretionary distributions of trust income; during the current year $1,000 is distributed to beneficiary
B. The taxable portion of this amount is
a. $0
b. $808
c. $1,000
d. $708
40. A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DNI) during
its current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the
remaining amount is made up of dividends. According to the trust instrument, the trustee may make
discretionary distributions of trust income; during the current year $1,000 is distributed to beneficiary
B. The distribution made by the trust entitles the trust to a deduction of
a. $0
b. $808
c. $1,000
d. $708
41. In the current taxable year, Trust MN had DNI of $50,000, $10,000 of which was nontaxable. During
the year, Trustee T made a $15,000 cash distribution to beneficiary M and a $30,000 cash distribution to
beneficiary N. (The trust instrument does not require that all trust income be distributed to beneficiaries.)
Based on these facts,
a. M should report taxable income of $15,000; N should report taxable income of $30,000.
b. M should report taxable income of $15,000; N should report taxable income of $25,000.
c. M should report taxable income of $16,667; N should report taxable income of $33,333.
d. M should report taxable income of $12,000; N should report taxable income of $24,000.
15-8 Chapter 15 Income Taxation of Estates and Trusts

42. Which of the following statements is not a characteristic of DNI (distributable net income)?
a. DNI can be composed of both nontaxable and taxable amounts of income.
b. Any trust taxable income allocable to corpus under state law is not included in DNI.
c. In computing DNI, no deduction for a personal exemption is allowed.
d. DNI is the amount of fiduciary accounting income that the trustee may distribute under the terms
of the governing instrument.
43. In the calculation of the distributable net income of a fiduciary, which of the following statements is
true?
a. A deduction for a personal exemption is allowed.
b. Net tax-exempt income is excluded.
c. A deduction for trustee fees allocable to corpus is allowed.
d. A deduction for any net capital loss is allowed.
44. A fiduciary is instructed by a trust instrument to distribute currently all trust income equally between
two beneficiaries. Furthermore, the corpus of the trust is to be preserved intact for the remainderman.
The instrument states that no charitable contributions are allowed from either income or principal.
During the year, the trust’s DNI was $23,000: $22,000 from rents and $1,000 from interest on a tax-
exempt debenture. Based on these facts, the trust is a(n)
a. Simple trust
b. Complex trust
c. Grantor trust
d. Income trust
45. A fiduciary is instructed by a trust instrument to distribute currently all trust income equally between
two beneficiaries. Furthermore, the corpus of the trust is to be preserved intact for the remainderman.
The instrument states that no charitable contributions are allowed from either income or principal.
During the year, the trust’s DNI was $23,000: $22,000 from rents and $1,000 from interest on a tax-
exempt debenture. Compute the reportable income for one of the beneficiaries (B), and the trust’s
deduction for distributions made to the beneficiaries.
a. $11,000 taxable to B; $22,000 deductible by trust
b. $11,000 taxable to B; $23,000 deductible by trust
c. $11,500 taxable to B; $22,000 deductible by trust
d. $11,500 taxable to B; $23,000 deductible by trust
46. Which of the following statements is not a characteristic of a complex trust?
a. A complex trust may have both “first-tier” and “second-tier” beneficiaries.
b. A complex trust may not make any charitable contributions during the year.
c. A complex trust that is not required to distribute all income currently may only claim a $100
personal exemption.
d. A complex trust may make distributions of both trust income and corpus.
47. In the current taxable year, Trust XYZ had fully taxable DNI of $100,000. Under the terms of the
trust instrument, the trustee was required to make a $60,000 income distribution to beneficiary X. In
addition, the trustee made discretionary cash distributions in the current taxable year of $20,000 each
to beneficiaries X, Y, and Z. Based on these facts,
a. X should report taxable income of $66,667; Y and Z should each report taxable income
of $16,667.
b. X should report taxable income of $80,000; Y and Z should each report taxable income
of $10,000.
c. X should report taxable income of $73,333; Y and Z should each report taxable income
of $13,333.
d. All distributions are fully taxable to X, Y, and Z.
48. A complex trust has $70,000 in DNI for the current year. One-tenth of the income is from tax-exempt
bonds. Distributions to beneficiaries total $7,000 for the current year. The trust must report taxable
DNI of
a. $70,000
b. $63,000
c. $6,300
d. $56,700
 Test Bank 15-9

49. When allocating DNI among beneficiaries who have received distributions during the taxable year
exceeding DNI, the tier one distributions represent
a. Distributions other than those required to be paid currently
b. Distributions of tax-exempt income only
c. Distributions required to be paid currently
d. Distributions of taxable income only
50. During the current year, Trust S had the following receipts and expenses:

Taxable interest $45,000

Tax-exempt interest from municipal bonds 15,000
Trustee fee (2,000)

During the year, $43,500 was distributed to X, the sole income beneficiary. The trust instrument does
not require that all trust income be distributed to X annually. Based on these facts, the § 661(a)
distribution deduction available to the trust is

a. $58,000
b. $43,500
c. $33,750
d. $32,625
51. Father created a testamentary simple trust for his two sons, A and B. Father’s will clearly indicates
that A and B should have an equal interest in both income and corpus but also allows the trustee
considerable discretion to deal with any financial emergencies. A needs a kidney transplant and
cannot afford the operation without larger distributions from the trust. B does not object and tells the
trustee to “do what Dad would have wanted.” If the trust’s DNI was $50,000 for the current year
(100% taxable) and A receives a cash distribution of $60,000, A’s taxable income from the trust is
a. $0
b. $25,000
c. $50,000
d. $60,000
 15
Income Taxation of
Estates and Trusts

Solutions to Test Bank

True or False

1. True. It may take several years to determine how the estate will be distributed. As long as reasonable
progress is being made to settle the decedent’s affairs, the IRS will continue to recognize the estate. (See
p. 15-1.)

2. False. As a general rule, fiduciaries must make estimated tax payments in the same manner as individuals.
[See p. 15-5 and § 6654(l).]

3. False. An estate may elect its own taxable year, regardless of the taxable year of the decedent. The first
taxable year of the estate starts the day after the decedent’s death. (See p. 15-5.)

4. True. [See p. 15-5 and § 641(b).]

5. False. A fiduciary is not entitled to a standard deduction. [See p. 15-6 and § 63(c)(6)(D).]

6. False. Fiduciary expenses are normally deductible under § 212, which permits the deduction of ordinary
and necessary expenses incurred in the management, conservation, or maintenance of property held to
produce income. (See p. 15-6.)

7. False. The executor must elect to take these expenses as deductions for either estate tax purposes or
income tax purposes but not both. However, administration expenses that could be deducted for either
estate tax or income tax can be allocated between the two returns to achieve maximum tax benefit. [See
p. 15-8, § 642(g), and Reg. § 1.642(g)-2.]

8. True. This flexibility in the timing of the deduction is provided in § 642(c)(1). [See p. 15-9 and Reg.
§ 1.642(c)-1(b).]

9. False. Losses do not pass through to trust beneficiaries except in the year of termination. [See p. 15-10 and
§ 642(d).]

10. False. There is no election as regards to income with respect to a decedent. The right to such income is
included as an asset in the gross estate and is also recognized as taxable income when received by the
fiduciary. [See pp. 15-11 and 15-12 and § 691(a).]

15-11
15-12 Chapter 15 Income Taxation of Estates and Trusts

11. True. The receivable represents “income in respect of a decedent” and receives no basis step-up to fair
market value at death. [See pp. 15-11 and 15-12 and §§ 691(a) and 1014(c).]

12. False. The appreciation of assets distributed in satisfaction of a pecuniary bequest must be recognized as
gain by the fiduciary. The basis to the distributee will be the FMV of the distributed assets. [See
Example 11, p. 15-14, and Reg. § 1.661(a)-2(f)(1).]

13. True. [See Example 10 and pp. 15-13 and 15-14 and § 643(e)(1).]

14. False. If the income is not available for distribution (e.g., capital gain allocated to the corpus), it is not
part of the distributable net income. (See p. 15-15.)

15. True. The conditions characterizing a trust as either simple or complex may vary every year. [See p. 15-15,
§ 651(a), and Reg. § 1.651(a)-1.]

16. False. A simple trust will pay tax on any taxable income allocated to corpus and therefore not available
for distribution to income beneficiaries. [See p. 15-16, § 651(b), and Reg. § 1.652(c)-4.]

17. True. Taxability of trust income to the beneficiaries of a simple trust is not dependent on cash flow. [See
p. 15-16 and § 652(a).]

18. False. Q will report the taxable portion of the distribution as income in the following year. This is his
taxable year within which the fiscal year of the estate during which the distribution is made (October
1-September 30) ends. [See Example 21, p. 15-21, and §§ 652(c) and 662(c).]

19. True. The distribution represents income previously taxed. [See p. 15-17.]

20. False. The kiddie tax does not apply to trusts. However, any investment income distributed to the child
could be subject to the kiddie tax.

Multiple Choice

21. a. By conducting the trust as a profit-making enterprise, the trustee runs the risk of having IRS classify
it as an association subject to corporate tax rates. (See pp. 15-2 and 15-3.)

22. a. In many cases “fiduciary accounting income” is different from the concept of taxable income. The
governing instrument and relevant state law—not the Internal Revenue Code—are used in its
calculation. (See pp. 15-3 and 15-4.)

23. b. S and GC. The trustee is not considered a beneficiary. However, both the recipient of an income
interest (S) and a remainder interest (GC) are beneficiaries. (See p. 15-3.)

24. b. $25,000. The fiduciary accounting income is computed as follows:

Tax-exempt interest $12,000

Dividends 15,000
Trustee fee allocable to income (2,000)
$25,000

Note that the long-term capital gain and the amount of the trustee fee allocable to corpus are not
included in the calculation. (See pp. 15-3 and 15-4.)
25. d. The trust instrument should be consulted to determine if capital gains are allocable to corpus. If the
instrument is silent on this point, state law may provide for their allocation to corpus. (See p. 15-3.)

26. b. The terms of a trust may charge part of the trustee’s fees to corpus and the remaining part to income.
(See p. 15-3.)
 Solutions to Test Bank 15-13

27. d. [See p. 15-3 and §§ 6012(a)(3), (4), and (5).]

28. b. (See p. 15-5.)

29. c. The exemption is $300 for a trust that is required by the trust instrument to distribute all trust income
currently. One definitional requirement under § 651 for a simple trust is that the trust be required to
distribute all income currently. [See p. 15-6 and § 642(b).]

30. d. A portion of the trustee fee must be allocated to fiduciary nontaxable income as follows:

Tax-exempt income $5,000

 $2;000 trustee fee ¼ $400
Total fiduciary income $25;000
ðall interest and rentÞ

Therefore, only $1,600 of the fee is deductible. The total amount of rent expense is deductible because
it is directly attributable to taxable fiduciary income. [See Example 3, p. 15-7, and Reg. § 1.652(b)-
3(b).]

31. b. A portion of the charitable contribution is considered paid out of fiduciary nontaxable income as
follows:

Tax-exempt income $15,000

 $3;000 contribution ¼ $1,000
Total fiduciary income $45;000
ðall interest and rentÞ

Therefore, only $2,000 of the contribution is deductible. [See Example 4, p. 15-9, and Reg. § 1.642(c)-
3(b).]

32. c. The allowable tax depreciation is allocated to the trust as follows:

Tax depreciation $18,000

Allocation for required trust reserve (10,000)
$8,000
Percentage of DNI retained by the trust 70%
$ 5,600

$10,000 plus $5,600 = $15,600 total depreciation allocated to the trust. [See Example 5, p. 15-9, and
Reg. § 1.167(h)-1.]
33. d. Section 642(g) prohibits the deduction by a fiduciary of any loss that has already been claimed as a
deduction on an estate return. (See p. 15-10.)

34. c. Income in respect of a decedent (IRD) and deductions in respect of a decedent (DRD) are items
reportable on the estate income tax return (Form 1041). [See p. 15-11 and §§ 691(a) and (b).]

35. d. Income flows through the fiduciary to the beneficiary, retaining its original character as taxable
income. Similarly, S corporations and partnerships act as conduits to shareholders and partners for
distributing taxable income. (See p. 15-13.)

36. c. Income produced by the estate’s assets retains its character when it flows through to the beneficiary.
The $5,000 ring is distributed to A as part of her share in the income of the estate, and therefore is
characterized as income to A. (See Example 9 on pp. 15-13 and 15-19.)

37. a. The distribution of the car does not represent an income distribution. [See Example 9, p. 15-13, and
§ 663(a)(1).]
15-14 Chapter 15 Income Taxation of Estates and Trusts

38. a. Because the property distribution is in satisfaction of a pecuniary bequest, the trust must take the
gain into income, and the recipient will have a basis equal to FMV of the property. [See Example 11,
p. 15-14, and Reg. § 1.661(a)-2(f).]
$10,500 taxable DNI
39. b. $1,000 distribution  ¼ $808
$13,000 total DNI
(See Example 12 and p. 15-15.)

40. b. The central concept of Subchapter J is that income recognized by a fiduciary will be taxed either to
the fiduciary itself or to the beneficiaries of the fiduciary. Any amount taxable to the beneficiaries is
deductible by the fiduciary. (See p. 15-13.)

41. d. Taxable DNI $40,000

¼ $80%
$13,000 total DNI
M’s distribution $15,000  80% = $12; 000
M’s distribution $15,000  80% = $12; 000

[See Examples 12, 15 and 16, p. 15-15 and Reg. § 1.662(b)-1.]

42. d. If tax deductible trust expenses are allocable to corpus under the governing trust instrument, DNI will
be less than fiduciary accounting income. (See pp. 15-13 and 15-14.)

43. c. For purposes of calculating fiduciary DNI, a deduction is always allowed for fees allocable to the
corpus. (See pp. 15-15 and 15-16 and § 643 for the definition of distributable net income.)

44. a. This trust meets the three requirements of § 651 for a simple trust: (1) required to distribute all trust
income currently, (2) no current deductions for charitable contributions, and (3) no current
distributions from corpus. (See p. 15-16.)

45. a. Total taxable DNI $22,000

Taxable DNI to B 11,000

The trust’s deduction is $22,000. (See Example 12 and pp. 15-14 and 15-15.)
46. b. A complex trust may make charitable contributions. [See p. 15-16 and § 651(a)(2).]

47. c. Taxable DNI $100,000

First-tier allocation (60,000)
DNI allocable pro rata to
second-tier distributions $ 40,000

$20,000 X’s second-tier distribution

 $40,000 ¼ $13; 333
$60,000 all second-tier distributions

Total taxable DNI allocable to X is $60,000 + $13,333 = $73; 333

[See Example 17, p. 15-18, and Reg. § 1.662(a)-3(d).]

48. d. To figure the trust’s taxable DNI, it is necessary to determine the beneficiary’s share of taxable DNI.
B received $7,000, but only $6,300 is taxable.

$63,000 taxable DNI

$7,000  ¼ $6,300
$70,000 DNI

The trust is allowed a $6,300 deduction for distribution to beneficiaries, so DNI taxable to trust is
$56,700 (taxable DNI of $63,000  $6,300 taxable distribution). [See p. 15-17 and § 661(c).]
 Solutions to Test Bank 15-15

49. c. A “tier-one distribution” or “first-tier” distribution is any distribution of fiduciary income required to
be paid currently. (See p. 15-18 and § 662.)

50. d. $32,625. The deduction is computed as follows:

Taxable Tax-exempt
Interest Total
Income $45,000 $15,000 $60,000
Trustee fee (1,500) (500) (2,000)
Distributable net income $43,500 $14,500 $58,000
Distribution $32,625 $10,875 $43,500

All numbers are allocated based on the income percentages of 75 percent and 25 percent.
The trust may deduct the amount of taxable DNI distributed. The total distribution of $43,500 is
considered to be a proportionate distribution of both taxable and nontaxable DNI. Thus, the
deduction is limited to $32,625, or 75 percent of the total distribution. [See pp. 15-14 through 15-15
and Reg. § 1.661(c)-2(d).]
51. b. The separate share rule codified in § 663(c) provides that if a trust contains substantially separate
shares for different beneficiaries, the trusts can be treated as separate trusts for purposes of
determining DNI. Thus, A would have tax liability only for the separate share of $25,000. The
“separate share” rule reflects the clear intent of the grantor that A only be responsible for half of the
trust income and no more. (See p. 15-21.)
 15
Income Taxation of
Estates and Trusts

Comprehensive Problems

FACTS FOR COMPREHENSIVE PROBLEMS

In the current year, the Mixon Family Trust had the following income and expense items.

Rental income $104,000

Dividends from equity stocks 15,890
Tax-exempt interest income 23,400
Long-term capital gain from stock sales 43,100
Rental operating expenses 33,443
Trustee fee 12,000

Under the terms of the trust instrument, all capital gains and 50 percent of the trustee fee is allocated to the principal
account. The trust instrument requires that the trustee maintain a reserve for depreciation equal to the tax
depreciation deduction for the current year, which is $9,650. The trustee is required to distribute $20,000 of trust
income annually to Janey Mixon; the trustee has the discretion to distribute additional amounts of income or
corpus to Janey, Jonathan, or Mark Mixon. During the year, the trustee distributed $30,000 to each of the three
named beneficiaries.

COMPREHENSIVE PROBLEMS
1. Calculate the following amounts for the current year and show your work.

a. Trust accounting income

b. Trust taxable income before the deduction for distributions to beneficiaries
c. Distributable net income (DNI)
d. Trust taxable income

2. Calculate the amount and character of income distributed to each trust beneficiary for the current year.

15-17
15-18 Chapter 15 Income Taxation of Estates and Trusts

Solutions to Comprehensive Problems

1. a. Rental income $104,000

Dividends from equity stocks 15,890
Tax-exempt interest income 23,400
Total income $143,290
Rental operating expenses (33,443)
Reserve for depreciation (9,650)
Trustee fee allocated to income account (6,000)
Trust accounting income $ 94,197

b. Rental income $104,000

Dividends from equity stocks 15,890
Long-term capital gain from stock sales 43,100
Gross income $162,990
Rental operating expenses (33,443)
Tax depreciation (9,650)
Trustee fee allocated
to taxable income ($12,000
$1,960*) (10,040)
Personal exemption (100)
Trust taxable income
before the deduction for
$109,757
distributions to beneficiaries

*$23,400 tax-exempt income

 $12,000 trustee fee = $1,960
$143,290 total income

c. Trust taxable income

before the deduction for
distributions to beneficiaries $109,757
Plus: Personal exemption ,100
net tax-exempt interest
($23,400
$1,960 trustee fee) 21,440
Less: Long-term capital gain (43,100)
Distributable net income $ 88,197

d. Trust taxable income

before the deduction for
distributions to beneficiaries $109,757
Deduction for distributions
to beneficiaries* (66,757)
Trust taxable income $ 43,000

*Because distributions to beneficiaries ($90,000) exceeds DNI ($88,197), the entire taxable portion of
DNI ($88,197
$21,400) becomes the maximum deduction to the trust.
 Solutions to Comprehensive Problems 15-19

2. The $90,000 distribution to beneficiaries exceeded DNI; therefore total DNI must be allocated to the
beneficiaries:

Total DNI $ 88,197

Allocation to first-tier distribution to Janey (20,000)
DNI allocable to second-tier distributions $ 68,197

Second-tier DNI
Distributions Allocations
Janey $10,000 $ 9,743
Jonathan 30,000 29,227
Mark 30,000 29,227
Total $70,000 $68,197

The composition of DNI is as follows:

Tax-exempt
Rent Dividends Interest Total
Gross income $104,000 $ 15,890 $23,400 $143,290
Rent expense (33,443) (33,443)
Depreciation (9,650) (9,650)
Trustee fee* ,000 (10,040) (1,960) (12,000)
Total $ 60,907 $ 5,850 $21,440 $ 88,197

*The trustee fee allocable to taxable income may be arbitrarily allocated to any item of
taxable income [see Reg. § 1.653(b)-3(b)]. Each beneficiary should report the following:
Tax-exempt
Rent Dividends Interest Total
$20,539 $1,974 $ 7,230 $29,743
Jonathan 20,184 1,938 7,105 29,227
Mark 20,184 1,938 7,105 29,227
Total $60,907 $5,850 $21,440 $88,197

Each beneficiary’s share of DNI consists of a pro rata share of each item of income included in DNI.
 15
Income Taxation of
Estates and Trusts

Solutions to Tax Return Problems

15-32 The solution to the MKJ Trust tax return problem in on the following pages:

15-21
15-22 Chapter 15 Income Taxation of Estates and Trusts

15-32 MKJ Trust Tax Return

1041 2011
Department of the Treasury—Internal Revenue Service
Form

U.S. Income Tax Return for Estates and Trusts OMB No. 1545-0092
A Check all that apply: For calendar year 2011 or fiscal year beginning , 2011, and ending , 20

MKJ TRUST
Decedent’s estate Name of estate or trust (If a grantor type trust, see the instructions.) C Employer identification number
Simple trust
Name and title of fiduciary D Date entity created

11-11-00
Complex trust
Qualified disability trust
ESBT (S portion only) Number, street, and room or suite no. (If a P.O. box, see the instructions.) E Nonexempt charitable and split-
interest trusts, check applicable
Grantor type trust box(es), see instructions.
Bankruptcy estate-Ch. 7 Described in sec. 4947(a)(1). Check here
Bankruptcy estate-Ch. 11 City or town, state, and ZIP code if not a private foundation . . .▶
Pooled income fund Described in sec. 4947(a)(2)
B Number of Schedules K-1 F Check Initial return Final return Amended return Change in trust's name
attached (see applicable
instructions) ▶ boxes: Change in fiduciary Change in fiduciary's name Change in fiduciary's address
G Check here if the estate or filing trust made a section 645 election . . . . . . ▶
SCHEDULE 1 20,000
M
1 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2a Total ordinary dividends . . . . . . . . . . . . . . . . . . . . . . . . 2a 30,000
b Qualified dividends allocable to: (1) Beneficiaries 16,476
(2) Estate or trust 13,524
3 Business income or (loss). Attach Schedule C or C-EZ (Form 1040) . . . . . . . . . 3
Income

4 Capital gain or (loss). Attach Schedule D (Form 1041) . . . . . . . . . . . . . . 4 18,000

5 Rents, royalties, partnerships, other estates and trusts, etc. Attach Schedule E (Form 1040) . 5 14,800
6 Farm income or (loss). Attach Schedule F (Form 1040) . . . . . . . . . . . . . . 6
7 Ordinary gain or (loss). Attach Form 4797 . . . . . . . . . . . . . . . . . . 7
8 Other income. List type and amount 8
9 Total income. Combine lines 1, 2a, and 3 through 8 . . . . . . . . . . . . . ▶ 9 82,800
10 Interest. Check if Form 4952 is attached ▶ . . . . . . . . . . . . . . . 10
11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
12 SCHEDULE 1
Fiduciary fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3,975
13 SCHEDULE 1
Charitable deduction (from Schedule A, line 7) . . . . . . . . . . . . . . . . 13 9,000
22,800
Deductions

14 Attorney, accountant, and return preparer fees . . . . . . . . . . . . . . . . 14

15a Other deductions not subject to the 2% floor (attach schedule) . . . . . . . . . . . 15a
b Allowable miscellaneous itemized deductions subject to the 2% floor . . . . . . . . . 15b
16 Add lines 10 through 15b . . . . . . . . . . . . . . . . . . . . . . ▶ 16 35,775
17 Adjusted total income or (loss). Subtract line 16 from line 9 . . . 17 47,025
18 Income distribution deduction (from Schedule B, line 15). Attach Schedules K-1 (Form 1041) 18 15,941
19 Estate tax deduction including certain generation-skipping taxes (attach computation) . . . 19
20 Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 100
21 Add lines 18 through 20 . . . . . . . . . . . . . . . . . . . . . . . ▶ 21 16,041
22 Taxable income. Subtract line 21 from line 17. If a loss, see instructions . . . . . . . . 22 30,984
23 2011 Tax Rates
Total tax (from Schedule G, line 7) . . . . . . . . . . . . . . . . . . . . 23 4,303
24 Payments: a 2011 estimated tax payments and amount applied from 2010 return . . . . 24a 9,000
Tax and Payments

b Estimated tax payments allocated to beneficiaries (from Form 1041-T) . . . . . . . . 24b

c Subtract line 24b from line 24a . . . . . . . . . . . . . . . . . . . . . 24c 9,000
d Tax paid with Form 7004 (see instructions) . . . . . . . . . . . . . . . . . 24d
e Federal income tax withheld. If any is from Form(s) 1099, check ▶ . . . . . . . . 24e
Other payments: f Form 2439 ; g Form 4136 ; Total ▶ 24h
25 Total payments. Add lines 24c through 24e, and 24h . . . . . . . . . . . . . ▶ 25 9,000
26 Estimated tax penalty (see instructions) . . . . . . . . . . . . . . . . . . . 26
27 Tax due. If line 25 is smaller than the total of lines 23 and 26, enter amount owed . . . . . 27
28 Overpayment. If line 25 is larger than the total of lines 23 and 26, enter amount overpaid . . 28 4,697
29 Amount of line 28 to be: a Credited to 2012 estimated tax ▶ ; b Refunded ▶ 29 4,697
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and
belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Sign
May the IRS discuss this return
Here ▶
▲

with the preparer shown below

(see instr.)? Yes No
Signature of fiduciary or officer representing fiduciary Date EIN of fiduciary if a financial institution
Print/Type preparer’s name Preparer's signature Date PTIN
Paid Check if
self-employed
Preparer
Firm’s name ▶ Firm's EIN ▶
Use Only
Firm's address ▶ Phone no.
For Paperwork Reduction Act Notice, see the separate instructions. Cat. No. 11370H Form 1041 (2011)
 Solutions to Tax Return Problems 15-23

15-32 MKJ Trust Tax Return - continued

Form 1041 (2011) Page 2

Schedule A Charitable Deduction. Do not complete for a simple trust or a pooled income fund.
1 Amounts paid or permanently set aside for charitable purposes from gross income (see instructions) . 1 12,000
2 Tax-exempt income allocable to charitable contributions (see instructions) . . . . . . . . 2 3,000
3 Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . 3 9,000
4 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable purposes 4
5 Add lines 3 and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 9,000
6 Section 1202 exclusion allocable to capital gains paid or permanently set aside for charitable
purposes (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . 6
7 Charitable deduction. Subtract line 6 from line 5. Enter here and on page 1, line 13 . . . . . 7 9,000
Schedule B Income Distribution Deduction
1 Adjusted total income (see instructions) . . . . . . . . . . . . . . . . . . . . 1 47,025
2 $ 25,000 – $ 1,325 – $ 6,000 – $ 3,000 (SCHEDULE
Adjusted tax-exempt interest . . . . . . . . . . . . . . . . . . . . . 1)
. . 2 14,675
3 Total net gain from Schedule D (Form 1041), line 15, column (1) (see instructions) . . . . . . 3
4 Enter amount from Schedule A, line 4 (minus any allocable section 1202 exclusion) . . . . . 4
5 Capital gains for the tax year included on Schedule A, line 1 (see instructions) . . . . . . . 5
6 Enter any gain from page 1, line 4, as a negative number. If page 1, line 4, is a loss, enter the loss
as a positive number . . . . . . . . . . . . . . . . . . . . . . . . . . 6 –18,000
7 Distributable net income. Combine lines 1 through 6. If zero or less, enter -0- . . . . . . . 7 43,700
8 If a complex trust, enter accounting income for the tax year as SCHEDULE 1
determined under the governing instrument and applicable local law . 8 58,350
9 Income required to be distributed currently . . . . . . . . . . . . . . . . . . . 9
10 Other amounts paid, credited, or otherwise required to be distributed . . . . . . . . . . 10 24,000
11 Total distributions. Add lines 9 and 10. If greater than line 8, see instructions . . . . . . . 11 24,000
12 (SCHEDULE 1) $ 14,675
Enter the amount of tax-exempt income included on line 11 . . . . . . . . . . . . . 12 8,059
13 x 54.92%
Tentative income distribution deduction. Subtract line 12 from line 11 . . . . . . . . . . 13 15,941
14 Tentative income distribution deduction. Subtract line 2 from line 7. If zero or less, enter -0- . . 14 29,025
15 Income distribution deduction. Enter the smaller of line 13 or line 14 here and on page 1, line 18 15 15,941
Schedule G Tax Computation (see instructions)
1 Tax: a Tax on taxable income (see instructions) . . . . . . . 1a 4,303
b Tax on lump-sum distributions. Attach Form 4972 . . . . 1b
c Alternative minimum tax (from Schedule I (Form 1041), line 56) 1c
d Total. Add lines 1a through 1c . . . . . . . . . . . . . . . . . . . ▶ 1d 4,303
2a Foreign tax credit. Attach Form 1116 . . . . . . . . . . . . 2a
b General business credit. Attach Form 3800 . . . . . . . . . . 2b
c Credit for prior year minimum tax. Attach Form 8801 . . . . . . 2c
d Bond credits. Attach Form 8912 . . . . . . . . . . . . . 2d
3 Total credits. Add lines 2a through 2d . . . . . . . . . . . . . . . . . . . ▶ 3
4 Subtract line 3 from line 1d. If zero or less, enter -0- . . . . . . . . . . . . . . . . 4 4,303
5 Recapture taxes. Check if from: Form 4255 Form 8611 . . . . . . . . . . . 5
6 Household employment taxes. Attach Schedule H (Form 1040) . . . . . . . . . . . . 6
7 Total tax. Add lines 4 through 6. Enter here and on page 1, line 23 . . . . . . . . . . ▶ 7 4,303
Other Information Yes No
1 Did the estate or trust receive tax-exempt income? If “Yes,” attach a computation of the allocation of expenses
Enter the amount of tax-exempt interest income and exempt-interest dividends ▶ $
2 Did the estate or trust receive all or any part of the earnings (salary, wages, and other compensation) of any
individual by reason of a contract assignment or similar arrangement? . . . . . . . . . . . . . . .
3 At any time during calendar year 2011, did the estate or trust have an interest in or a signature or other authority
over a bank, securities, or other financial account in a foreign country? . . . . . . . . . . . . . .
See the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,” enter the name of the
foreign country ▶
4 During the tax year, did the estate or trust receive a distribution from, or was it the grantor of, or transferor to, a
foreign trust? If “Yes,” the estate or trust may have to file Form 3520. See instructions . . . . . . . . .
5 Did the estate or trust receive, or pay, any qualified residence interest on seller-provided financing? If “Yes,” see
the instructions for required attachment . . . . . . . . . . . . . . . . . . . . . . . . .
6 If this is an estate or a complex trust making the section 663(b) election, check here (see instructions) . . ▶
7 To make a section 643(e)(3) election, attach Schedule D (Form 1041), and check here (see instructions) . . ▶
8 If the decedent’s estate has been open for more than 2 years, attach an explanation for the delay in closing the estate, and check here ▶
9 Are any present or future trust beneficiaries skip persons? See instructions . . . . . . . . . . . . .
Form 1041 (2011)
15-24 Chapter 15 Income Taxation of Estates and Trusts

15-32 MKJ Trust Tax Return - continued

SCHEDULE D OMB No. 1545-0092

(Form 1041) Capital Gains and Losses
Department of the Treasury
Internal Revenue Service
▶ Attach to Form 1041, Form 5227, or Form 990-T. See the Instructions for
Schedule D (Form 1041) (also for Form 5227 or Form 990-T, if applicable).
2011
Name of estate or trust Employer identification number
MKJ TRUST
Note: Form 5227 filers need to complete only Parts I and II.
Part I Short-Term Capital Gains and Losses—Assets Held One Year or Less
(a) Description of property (b) Date acquired (c) Date sold (f) Gain or (loss) for
(e) Cost or other basis the entire year
(d) Sales price (see instructions)
(Example: 100 shares 7% preferred of “Z” Co.) (mo., day, yr.) (mo., day, yr.) Subtract (e) from (d)
1a

b Enter the short-term gain or (loss), if any, from Schedule D-1, line 1b . . . . . . . . . . 1b

2 Short-term capital gain or (loss) from Forms 4684, 6252, 6781, and 8824 . . . . . . . . . 2

3 Net short-term gain or (loss) from partnerships, S corporations, and other estates or trusts . . . 3
4 Short-term capital loss carryover. Enter the amount, if any, from line 9 of the 2010 Capital Loss
Carryover Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ( )
5 Net short-term gain or (loss). Combine lines 1a through 4 in column (f). Enter here and on line 13,
column (3) on the back . . . . . . . . . . . . . . . . . . . . . . . . ▶ 5
Part II Long-Term Capital Gains and Losses—Assets Held More Than One Year
(a) Description of property (b) Date acquired (c) Date sold (e) Cost or other basis (f) Gain or (loss) for
(d) Sales price the entire year
(Example: 100 shares 7% preferred of “Z” Co.) (mo., day, yr.) (mo., day, yr.) (see instructions) Subtract (e) from (d)
6a
GENERAL MOTOR 11/11/00 12/02/10 48,000. 30,000. 18,000.

b Enter the long-term gain or (loss), if any, from Schedule D-1, line 6b . . . . . . . . . . 6b

7 Long-term capital gain or (loss) from Forms 2439, 4684, 6252, 6781, and 8824 . . . . . . . 7

8 Net long-term gain or (loss) from partnerships, S corporations, and other estates or trusts . . . 8

9 Capital gain distributions . . . . . . . . . . . . . . . . . . . . . . . . . 9

10 Gain from Form 4797, Part I . . . . . . . . . . . . . . . . . . . . . . . . 10

11 Long-term capital loss carryover. Enter the amount, if any, from line 14 of the 2010 Capital Loss
Carryover Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ( )
12 Net long-term gain or (loss). Combine lines 6a through 11 in column (f). Enter here and on line 14a,
column (3) on the back . . . . . . . . . . . . . . . . . . . . . . . . ▶ 12 18,000.
For Paperwork Reduction Act Notice, see the Instructions for Form 1041. Cat. No. 11376V Schedule D (Form 1041) 2011
 Solutions to Tax Return Problems 15-25

15-32 MKJ Trust Tax Return - continued

Schedule D (Form 1041) 2011 Page 2

Part III Summary of Parts I and II (1) Beneficiaries’ (2) Estate’s
(3) Total
Caution: Read the instructions before completing this part. (see instr.) or trust’s
13 Net short-term gain or (loss) . . . . . . . . . . 13
14 Net long-term gain or (loss):
a Total for year . . . . . . . . . . . . . . . 14a 18,000. 18,000.
b Unrecaptured section 1250 gain (see line 18 of the wrksht.) . 14b
c 28% rate gain . . . . . . . . . . . . . . . 14c
15 Total net gain or (loss). Combine lines 13 and 14a . . ▶ 15 18,000. 18,000.
Note: If line 15, column (3), is a net gain, enter the gain on Form 1041, line 4 (or Form 990-T, Part I, line 4a). If lines 14a and 15, column (2), are net
gains, go to Part V, and do not complete Part IV. If line 15, column (3), is a net loss, complete Part IV and the Capital Loss Carryover Worksheet, as
necessary.
Part IV Capital Loss Limitation
16 Enter here and enter as a (loss) on Form 1041, line 4 (or Form 990-T, Part I, line 4c, if a trust), the smaller of:
a The loss on line 15, column (3) or b $3,000 . . . . . . . . . . . . . . . . . 16 ( )
Note: If the loss on line 15, column (3), is more than $3,000, or if Form 1041, page 1, line 22 (or Form 990-T, line 34), is a loss, complete the Capital
Loss Carryover Worksheet in the instructions to figure your capital loss carryover.
Part V Tax Computation Using Maximum Capital Gains Rates
Form 1041 filers. Complete this part only if both lines 14a and 15 in column (2) are gains, or an amount is entered in Part I or Part II and there is an
entry on Form 1041, line 2b(2), and Form 1041, line 22, is more than zero.
Caution: Skip this part and complete the Schedule D Tax Worksheet in the instructions if:
• Either line 14b, col. (2) or line 14c, col. (2) is more than zero, or
• Both Form 1041, line 2b(1), and Form 4952, line 4g are more than zero.
Form 990-T trusts. Complete this part only if both lines 14a and 15 are gains, or qualified dividends are included in income in Part I of Form 990-T,
and Form 990-T, line 34, is more than zero. Skip this part and complete the Schedule D Tax Worksheet in the instructions if either line 14b, col. (2) or
line 14c, col. (2) is more than zero.

17 Enter taxable income from Form 1041, line 22 (or Form 990-T, line 34) . . 17 30,984.
18 Enter the smaller of line 14a or 15 in column (2)
but not less than zero . . . . . . . . . 18 18,000. NLTCG
19 Enter the estate’s or trust’s qualified dividends from
Form 1041, line 2b(2) (or enter the qualified dividends
included in income in Part I of Form 990-T) . . . . 19 13,524. QUALIFIED DIVIDENDS
20 Add lines 18 and 19 . . . . . . . . . 20 31,524.
21 If the estate or trust is filing Form 4952, enter the
amount from line 4g; otherwise, enter -0- . . ▶ 21 0.
22 Subtract line 21 from line 20. If zero or less, enter -0- . . . . . . . 22 31,524.
23 Subtract line 22 from line 17. If zero or less, enter -0- . . . . . . . 23 0.
24 Enter the smaller of the amount on line 17 or $2,300 . . . . . . . 24 2,300.
25 Is the amount on line 23 equal to or more than the amount on line 24?
Yes. Skip lines 25 and 26; go to line 27 and check the “No” box.
No. Enter the amount from line 23 . . . . . . . . . . . . . 25 0.
26 Subtract line 25 from line 24 . . . . . . . . . . . . . . . 26 2,300.
27 Are the amounts on lines 22 and 26 the same?
Yes. Skip lines 27 thru 30; go to line 31. No. Enter the smaller of line 17 or line 22 27 30,984.
28 Enter the amount from line 26 (If line 26 is blank, enter -0-) . . . . . 28 2,300.
29 Subtract line 28 from line 27 . . . . . . . . . . . . . . . 29 28,684.
30 Multiply line 29 by 15% (.15) . . . . . . . . . . . . . . . . . . . . . . . 30 4,303.
31 Figure the tax on the amount on line 23. Use the 2011 Tax Rate Schedule for Estates and Trusts
(see the Schedule G instructions in the instructions for Form 1041) . . . . . . . . . . . 31 0.
32 Add lines 30 and 31 . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4,303.
33 Figure the tax on the amount on line 17. Use the 2011 Tax Rate Schedule for Estates and Trusts
(see the Schedule G instructions in the instructions for Form 1041) . . . . . . . . . . . 33 9,809.
34 Tax on all taxable income. Enter the smaller of line 32 or line 33 here and on Form 1041, Schedule
G, line 1a (or Form 990-T, line 36) . . . . . . . . . . . . . . . . . . . . . . 34 4,303.
Schedule D (Form 1041) 2011
15-26 Chapter 15 Income Taxation of Estates and Trusts

15-32 MKJ Trust Tax Return - continued

SCHEDULE E Supplemental Income and Loss OMB No. 1545-0074

(Form 1040)
Department of the Treasury
Internal Revenue Service (99)
MKJ TRUST
Name(s) shown on return
2011
(From rental real estate, royalties, partnerships,
S corporations, estates, trusts, REMICs, etc.)
Attachment
▶ Attach to Form 1040, 1040NR, or Form 1041. ▶ See Instructions for Schedule E (Form 1040). Sequence No. 13
Your social security number

Part I Income or Loss From Rental Real Estate and Royalties Note. If you are in the business of renting personal property, use
Schedule C or C-EZ (see page E-3). If you are an individual, report farm rental income or loss from Form 4835 on page 2, line 40.
1 List the type and address of each rental real estate property: 2 For each rental real estate property Yes No
RENTAL PROPERTY listed on line 1, did you or your family
X
A use it during the tax year for personal
purposes for more than the greater of: A
• 14 days or
B
• 10% of the total days rented at fair B
rental value?
C
(See page E-4) C
Properties Totals
Income:
A B C (Add columns A, B, and C.)

3 Rents received . . . . . . 3 25,000 3 25,000

4 Royalties received . . . . . 4 4
Expenses:
5 Advertising . . . . . . . 5
6 Auto and travel (see page E-5) . 6
7 Cleaning and maintenance . . 7
8 Commissions. . . . . . . 8
9 Insurance . . . . . . . . 9
10 Legal and other professional fees 10
11 Management fees . . . . . 11
12 Mortgage interest paid to
banks, etc. (see page E-5) . . 12 12
13 Other interest. . . . . . . 13
14 Repairs. . . . . . . . . 14 4,200
15 Supplies . . . . . . . . 15
16 Taxes . . . . . . . . . 16 4,000
17 Utilities . . . . . . . . . 17
18 Other (list) ▶

18

19 Add lines 5 through 18. . . . 19 8,200 19 8,200

20 Depreciation expense or
depletion (see page E-5) . . . 20 2,000 20 2,000
21 Total expenses. Add lines 19 and 20 21 10,200 RESERVE ALLOCATED
22 Income or (loss) from rental real TO TRUST
estate or royalty properties.
Subtract line 21 from line 3 (rents)
or line 4 (royalties). If the result is
a (loss), see page E-6 to find out
if you must file Form 6198 . . 22 14,800
23 Deductible rental real estate loss.
Caution. Your rental real estate loss
on line 22 may be limited. See page
E-6 to find out if you must file Form
8582. Real estate professionals
must complete line 43 on page 2 . 23 ( )( )( )
24 Income. Add positive amounts shown on line 22. Do not include any losses . . . . . . . 24 14,800
25 Losses. Add royalty losses from line 22 and rental real estate losses from line 23. Enter total losses here 25 ( )
26 Total rental real estate and royalty income or (loss). Combine lines 24 and 25. Enter the result here. If
Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amount on Form 1040, line 17, or
Form 1040NR, line 18. Otherwise, include this amount in the total on line 41 on page 2 . . . . . . 26 14,800
For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 11344L Schedule E (Form 1040) 2011
 Solutions to Tax Return Problems 15-27

15-32 MKJ Trust Tax Return - continued

661111
Final K-1 Amended K-1 OMB No. 1545-0092

2011
Schedule K-1 Part III Beneficiary’s Share of Current Year Income,
(Form 1041) Deductions, Credits, and Other Items
Department of the Treasury 1 Interest income 11 Final year deductions
For calendar year 2011,
879
Internal Revenue Service
or tax year beginning , 2011,
and ending , 20 2a Ordinary dividends
12,316
Beneficiary’s Share of Income, Deductions, 2b Qualified dividends

Credits, etc. ▶ See back of form and instructions. 12,316

3 Net short-term capital gain

Part I Information About the Estate or Trust

A Estate’s or trust’s employer identification number 4a Net long-term capital gain

4b 28% rate gain 12 Alternative minimum tax adjustment

B Estate’s or trust’s name

MKJ TRUST 4c Unrecaptured section 1250 gain

5 Other portfolio and

nonbusiness income
C Fiduciary's name, address, city, state, and ZIP code

BRENDA JACOBS 6 Ordinary business income

7 Net rental real estate income

13 Credits and credit recapture

2,746
SEE SCHEDULE 1 FOR ALLOCATION
8 Other rental income

9 Directly apportioned deductions

15,941
D Check if Form 1041-T was filed and enter the date it was filed
15,941 14 Other information

E Check if this is the final Form 1041 for the estate or trust
10 Estate tax deduction 8,059
Part II Information About the Beneficiary 15,941
F Beneficiary's identifying number 15,941
G Beneficiary's name, address, city, state, and ZIP code

*See attached statement for additional information.

Note. A statement must be attached showing the
beneficiary’s share of income and directly apportioned
deductions from each business, rental real estate, and
other rental activity.
For IRS Use Only

H Domestic beneficiary Foreign beneficiary

For Paperwork Reduction Act Notice, see the Instructions for Form 1041. Cat. No. 11380D Schedule K-1 (Form 1041) 2011
15-28 Chapter 15 Income Taxation of Estates and Trusts

15-32 MKJ Trust Tax Return - continued

MKJ Trust—Form 1041, Schedule 1

Line 2b: Determination of qualified dividends for trust and beneficiaries

Qualified dividends are taxed at a maximum rate of 15% (5% if in the 15% tax bracket). A special
calculation must be made to determine the amount of qualified dividends retained by the trust to be taxed
at the favorable rate. The gross amount of qualified dividends, $30,000, is allocated between the trust and
the beneficiaries based on the percentage of distributable net income (DNI) distributed to the beneficiaries.
In this case, the total DNI was $43,700 and the trust distributed DNI of $24,000 or 54.92% ($24,000/
$43,700) of the DNI to the beneficiary. Thus the qualified dividends retained by the trust are $13,524
computed as follows:

Qualified dividends $30,000 $30,000

Allocation to beneficiary

DNI distributed to beneficiary $24;000

Total DNI $43;700
 54.92% (16,476)
Allocation to trust $13,524

Note that this method of allocating the amount of qualified dividends between the beneficiary and the
trust is used solely for this purpose; that is, for calculating the tax liability of the trust. The actual amount
of qualified dividends to be reported on the Schedule K-1 which the beneficiary must report is $7,154 as
shown below.

Lines 12 and 13:

$75;000 Taxable trust income

 $5;300 ¼ $3;975 Trustee fee
$100;000 Trust income

$75;000 Taxable trust income

 $12;000 ¼ $9;000 Charitable contribution
$100;000 Trust income

Calculation of DNI components:

Taxable Tax-exempt DNI
Rent Dividends Interest Interest Total
Gross $25,000 $30,000 $20,000 $25,000 $100,000
Trustee fee (3,975) (1,325) (5,300)
Legal fee (6,800) (16,000) (6,000) (28,800)
Rent expense (10,200) (10,200)
Contribution (3,000) (3,600) (2,400) (3,000) (12,000)
DNI $ 5,000 $22,425 $1,600 $14,675 $ 43,700

$24;000 Distribution
¼ 54:92%
$43;700 DNI

Note: If computer software is used, the allocation of expenses may differ. The software may minimize the
amount of expenses allocated to qualified dividend income.
 Solutions to Tax Return Problems 15-29

The Schedule K-1 for Brenda reflects her 54.92% ($24,000/$43,700) of each component of DNI as follows

Taxable Tax-Exempt DNI

Components of DNI Rent Dividends Interest Interest Total
DNI (see above) $5,000 $22,425 $1,600 $14,675 $43,700
DNI to beneficiary/total
DNI $24,000/$43,700 = 54.92% 54.92% 54.92% 54.92% 54.92% 54.92%
Schedule K-1 amounts $2,746 $ 12,316 $ 879 $ 8,059 $24,000

Schedule B Line 8 Trust Accounting Income

Trust
Accounting
Income/Expenses Amount Income
Dividends $ 30,000 $ 30,000
Rents 25,000 25,000
Tax-exempt interest 25,000 25,000
Taxable interest 20,000 20,000
Capital gains 18,000 —
Total $118,000 $100,000

Commissions to income (2,650) (2,650)

Commissions to corpus (2,650)
Depreciation reserve (2,000) (2,000)
Real estate taxes (4,000) (4,000)
Repairs and maintenance (4,200) (4,200)
Legal fee (28,800) (28,800)
Total $ 58,350

Schedule B Line 12 Tax-exempt income included in $24,000 distribution

Total DNI $43,700

Percent exempt ($14,675/$43,700) 33.6%
Percent taxable 66.4%

Amount of DNI distributed to beneficiary $24,000

 33.58%
Net tax-exempt in amount distributed $ 8,059

Alternative computation:

Net tax exempt amount $14,675

Percent of DNI received ($24,000/$43,700) 54.92%
Net tax-exempt in amount distributed $ 8,059