Federal Taxation XII: Fiduduary, Tax Research/Practise

Question 1

Fiduciary

Answer 1

Legal/ethical relationship of trust between two or more parties.

Typically, a fiduciary prudently takes care of money for another person.

Question 2

Trust

Answer 2

Legal entity created by xfer of property from a grantor.

Purpose of trust is to hold/administer property for beneficiaries according to terms of trust instrument.

Question 3

Terminable Interest

Answer 3

An interest that ends upon occurrence of a contingency.

Question 4

Remainderman

Answer 4

Person who receives property after present interest is terminated

Question 5

Contingent Interest

Answer 5

Interest that is created upon occurrence of a contingency

Question 6

Fiduciary: Single Taxation

Answer 6

Income taxed only once to either fiduciary or beneficiary

1. Distribution deduction for fiduciary prevents double taxation
2. Income taxed to beneficiaries retains its character (conduit approach)

Question 7

Simple Trust

Answer 7

1. must distribute all income currently
2. make no distributions of corpus currently
3. make no charitable contributions

Question 8

Grantor Trust

Answer 8

Trust controlled by grantor through retained powers or possibility the property will revert to the grantor

Question 9

Fiduciary: Personal Exemption

Answer 9

$600 for estates

$300 for simple trusts and complex trusts that distribute all of their income currently

$100 for all other complex trusts

Question 10

Fiduciary: Standard Deduction

Answer 10

None, but can deduct interest, taxes, charitable cont., trustee’s fees

Question 11

Fiduciary: Corpus

Answer 11

Principal/property in a trust/estate. Income earned on the principal is distinguished from the principal

Question 12

Fiduciary: Distributable Net Income (DNI)

Answer 12

Amount of accounting “income” available to be distributed

Typically, capital gains belong to corpus and are not part of DNI

Question 13

Fiduciary: Distributions of Income

Answer 13

1. cannot exceed DNI
2. property dist. generally treated as DNI
3. beneficiaries taxed on receipt of dist. (to extent of DNI)
4. beneficiaries report income for beneficiary’s tax year in which estate’s tax year ends

Question 14

Fiduciary: Calculation of DNI

Answer 14

Taxable Income
\+ Net tax-exempt income
\+ Personal exemption
\+ Net capital loss
- Net capital gains allocable to corpus

= Distributable net income

Question 15

Fiduciary Income Tax Formula

Answer 15

Gross Income
   - interest
   - taxes
   - business expenses
   - depreciation
   - charitable contributions
   (all less distribution deduction)
   - personal exemption

= Taxable Income

Question 16

Income in Respect of a Decedent

Answer 16

Income earned by decedent but not included in decedent’s final return.

Included in both estate income tax return and estate tax return

Question 17

Expenses in Respect of a Decedent

Answer 17

Deductible expenses paid after the date of death.

Deducted on both estate income tax return and estate tax return

Question 18

Primary Tax Authority

Answer 18

1. Legislative
2. Administrative
3. Judicial

Question 19

Legislative Authority from Congress

Answer 19

1. Constitution
2. IRC
3. Treaties
4. Committee Reports: House Ways/Means, Senate Finance, Joint Conf. Committee

Question 20

Administrative Authority from Treasury Dept. and IRS

Answer 20

1. Treasury regulations
   a. legislative
   b. interpretive
   c. procedural
   Proposed/Temporary/Final
2. Revenue rulings
3. Private letter rulings

Question 21

Judicial Authority from a court of original jurisdiction

Answer 21

1. U. S. Tax Court
2. U. S. District Courts
3. U. S. Court of Federal Claims
4. U. S. Tax Court - Small Cases Division

Question 22

Penalty: Nonfiling

Answer 22

1. 5% per month of tax due w/ return
2. Max: 24% tax due… Min: lesser of $135 or amount of tax due.
3. If fraudulent, penalty increases to 15% per month with max of 75% tax due w/ return

Question 23

Penalty: Underpayment

Answer 23

1. no penalty if tax due < $1K
2. no penalty if est. taxes were at least 90% of current or 100% of last years taxes (110% if AGI > $150K
3. annualization exception

Question 24

Substantial Understatement

Answer 24

Individual: additional tax due exceed greater of $5,000 or 10% of total tax on the return

Corporations: understatement exceeds lesser of of 10% tax required to be shown on return (or $10K if that is greater) OR $10M

Question 25

Substantial Misvaluation

Answer 25

Property is stated at 150% or more of correct amount. 20% penalty.

Question 26

Gross Misvaluation

Answer 26

Property is stated at 400% or more of correct amount. 40% penalty.

Question 27

Penalty: Fraud

Answer 27

75% of underpayment and addition of 50% of interest due on the underpayment.

Question 28

Statute of Limitations

Answer 28

1. Primary = 3 years from due date
2. 6 years if more than 25% gross income understated on return
3. Never expires if fraud

for Refund:

1. 2 years from payment of tax
2. 3 years from date return was filed (or due if later)

Question 29

Penalty Terminology

Answer 29

1. Not frivolous = not patently improper
2. Reasonable basis = at least one authority that has not been overruled
3. Substantial authority = more than reasonable basis
4. More likely than note = > 50% chance of succeeding

Question 30

Preparer Penalty: Unreasonable Position

Answer 30

Greater of $1,000 or 50% of income derived by preparer for preparing the return.

Question 31

Marginal Tax Rate

Answer 31

Should be used for decision making.

Amount of taxes that will be paid on the next dollar of taxable income, or that will be saved on the next dollar of deduction.