Incorrect Questions 3 Flashcards
The organizational test to qualify a public service charitable entity as tax exempt requires the articles of organization to
I. Limit the purpose of the entity to the charitable purpose.
II. State that an information return should be filed annually with the Internal Revenue Service.
A. I only. B. II only. C. Both I and II. D. Neither I nor II.
A. I only.
The charitable entity must affirm that its activities will be limited to its charitable purposes.
Even though an information return does have to be filed annually by many charitable entities, it is not required for all.
The private foundation status of an exempt organization will terminate if it
A. Becomes a public charity.
B. Is a foreign corporation.
C. Does not distribute all of its net assets to one or more public charities.
D. Is governed by a charter that limits the organization’s exempt purposes.
A. Becomes a public charity.
A private foundation is a tax-exempt organization which receives less than one-third of its annual support from its members and the general public. Therefore, public charities that solicit broad public support do not meet this definition.
What is the tax treatment of net losses in excess of the at-risk amount for an activity?
A. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
B. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
C. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
D. Any losses in excess of the at-risk amount are carried back two years against activities with income and then carried forward for 20 years.
B. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, year 1, PDK had the following income and expense items: Revenues $120,000 Interest income 6,000 Gain on sale of securities 8,000 Salaries 36,000 Guaranteed payments 10,000 Rent expense 21,000 Depreciation expense 18,000 Charitable contributions 3,000 What would PDK report as nonseparately stated income for year 1 tax purposes?
A. $30,000 B. $35,000 C. $43,000 D. $51,000
B. $35,000
Non-separately stated income is the ordinary business income of the LLC, computed as follows: Revenues $120,000 Salaries (36,000) Guaranteed payments (10,000) Rent expense (21,000) Depreciation expense (18,000) Ordinary income $35,000
Dale’s distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in 2015. On December 15, 2015, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership’s 2015 income, with the $23,000 balance paid to Dale in May 2016.
In addition, Dale received a $10,000 interest-free loan from the partnership in 2015.
This $10,000 is to be offset against Dale’s share of 2015 partnership income.
What total amount of partnership income is taxable to Dale in 2015?
A. $23,000 B. $37,000 C. $50,000 D. $60,000
C. $50,000
Partners must report their share of the partnership’s income, deductions and other items on the partner’s income tax return in the calendar year in which the partnership’s tax year ends. Dale’s share of Dale and Eck’s 2015 income was $50,000. Thus, Dale must report $50,000 of partnership income in 2015.
Abe, Betsy, and Dan decide to form the equal ABD partnership at the beginning of Year One. Abe contributed depreciable assets that he has owned for five years that have a basis of $15,000 and a value of $20,000. Betsy contributed $20,000 cash. Dan contributed $12,000 in cash and land with a basis of $5,000 and a value of $8,000. How much income is allocated to Abe if the partnership sells the assets contributed by Abe for $18,000? A. $0 B. $1,000 C. $3,000 D. $5,000
C. $3,000
The realized gain on the sale of the assets is $3,000 ($18,000 – $15,000 basis in assets). Abe’s built in gain on the contribution is $5,000. The amount of gain allocated to Abe is the lower of the realized gain or built-in gain, so $3,000 is the allocation.
Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for
A. Payments of principal on secured notes honored at maturity.
B. Timely payments of periodic interest on bona fide loans that are not treated as partners’ capital.
C. Services or the use of capital without regard to partnership income.
D. Sales of partners’ assets to the partnership at guaranteed amounts regardless of market values.
C. Services or the use of capital without regard to partnership income.
Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are
I. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss).
II. Included on schedules K-1 to be taxed as ordinary income to the partners.
A. I only. B. II only. C. Both I and II. D. Neither I nor II.
C. Both I and II.
Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2015 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista’s 2015 partnership income consisted of:
Net business income before guaranteed payments $80,000
Net long-term capital gains 10,000
What amount of income should Evan report from Vista Partnership on her 2015 tax return?
A. $37,500 B. $27,500 C. $22,500 D. $20,000
A. $37,500
Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner’s share of the partnership’s income. Thus, Evan would treat the $20,000 payment from the partnership for services rendered as income on her 2015 tax return. She also must report her share of the partnership’s net income. Since the guaranteed payments qualify as a deductible expense, Vista’s partnership income may be reduced by the amount of the expense. Hence, the partnership’s income would be $70,000; $80,000 in net business income before guaranteed payments plus the $10,000 net long-term capital gain less the $20,000 guaranteed payment. Evan’s 25 percent share of the partnership’s income would be $17,500 (25 percent × $70,000). Thus, Evan would report $37,500 in income from the Vista Partnership on her 2015 tax return − the sum of the guaranteed payment ($20,000) and her share of the partnership’s income ($17,500).
Which of the following is an eligibility requirement in 2015 to file a valid election to be taxed as an S corporation?
A. Must have no more than 75 shareholders, and a husband and wife who each own stock are counted as two shareholders. B. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as two shareholders. C. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as one shareholder. D. Must have no more 75 shareholders, and a husband and wife who each own stock are counted as one shareholder.
C. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as one shareholder.
The shareholder limit is 100 and members of the same family count as one shareholder.
Bristol Corp. was formed as a C corporation on January 1, 1980, and elected S corporation status on January 1, 1987. At the time of the election, Bristol had accumulated C corporation earnings and profits which have not been distributed. Bristol has had the same 25 shareholders throughout its existence.
In 2015 Bristol’s S election will terminate if it
A. Increases the number of shareholders to 75. B. Adds a decedent's estate as a shareholder to the existing shareholders. C. Takes a charitable contribution deduction. D. Has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, 2014.
D. Has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, 2014.
Village Corp., a calendar year corporation, began business in 2002. Village made a valid S Corporation election on December 5, 2014, with the unanimous consent of its shareholders. The eligibility requirements for S status continued to be met throughout 2014 and 2015.
On what date did Village’s S status become effective?
A. January 1, 2014 B. January 1, 2015. C. December 5, 2014. D. December 5, 2015.
B. January 1, 2015.
An S Corporation election is effective for the current tax year, if made by the 15th day of the third month of the tax year. Since the election is after to March 15, 2014 it is effective for 2015.
An S Corporation has 30,000 shares of voting common stock and 20,000 shares of non-voting common stock issued and outstanding. The S election can be revoked voluntarily with the consent of the shareholders holding, on the day of the revocation,
Shares of voting stock Shares of nonvoting stock
0 20,000
7,500 5,000
10,000 16,000
20,000 0
Shares of voting stock 10,000
Shares of nonvoting stock 16,000
A corporation’s S election may be revoked voluntarily with the consent of the shareholders holding a majority of the corporation’s issued and outstanding stock, including non-voting stock.
Since, in this case, the S corporation has 30,000 shares of voting common stock and 20,000 shares of non-voting common stock issued and outstanding, shareholders holding at least 25,001 shares of stock would be needed to have a majority and, as a result, the ability to revoke the corporation’s S election.
This response correctly indicates that shareholders controlling 26,000 shares of stock (10,000 shares of voting and 16,000 shares of non-voting) would have the ability to voluntarily revoke the corporation’s S election despite their not having a majority of the voting shares.
After a corporation's status as an S corporation is revoked or terminated, how many years is the corporation required to wait before making a new S election, in the absence of IRS consent to an earlier election? A. 1 B. 3 C. 5 D. 10
C. 5
Once a corporation’s S status is revoked or terminated, the corporation must wait five years before making a new S election, in the absence of IRS consent to an earlier election.
Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest’s balance sheet was as follows:
Cash $2,000
Equipment (adjusted basis) 2,000
Capital - Stone 3,000
Capital - Frazier 1,000
The fair market value of the equipment was $3,000. Frazier’s outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize?
A. $0 B. $250 C. $300 D. $500
C. $300
Fraizer received cash of $1,500 less his basis in the partnership of $1,200 = gain of $300.
The basis to a partner of property distributed “in kind” in complete liquidation of the partner’s interest is the
A. Adjusted basis of the partner’s interest increased by any cash distributed to the partner in the same transaction.
B. Adjusted basis of the partner’s interest reduced by any cash distributed to the partner in the same transaction.
C. Adjusted basis of the property to the partnership.
D. Fair market value of the property.
B. Adjusted basis of the partner’s interest reduced by any cash distributed to the partner in the same transaction.
In the current year, when Hoben’s tax basis in Lynz Partnership interest was $10,000, Hoben received a liquidating distribution as follows:
Adjusted tax basis Fair market value
Marketable securities $ 5,000 $ 5,000
Land 25,000 27,000
Lynz had no appreciated inventory, unrealized receivables, or properties that had been contributed by its partners. What was Hoben’s recognized gain on the distribution?
A. $0 B. $15,000 C. $22,000 D. $23,000
A. $0
Gain is recognized on a partnership distribution ONLY if the cash distributed exceeds the basis in the partnership interest. In this case there was no cash distributed, so no gain is recognized.
As a general partner in Greenland Associates, an individual's share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland? A. $5,000 B. $25,000 C. $35,000 D. $40,000
C. $35,000
The partner must report $25,000 of ordinary income and the $10,000 guaranteed payment. The distribution does not generate additional income since the partner has sufficient basis to absorb it.
Hart’s adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distributions of partnership property:
Cash $ 5,000 Land Adjusted basis 7,000 Fair market value 10,000 What was the amount of Hart's basis in the land?
A. $0 B. $4,000 C. $7,000 D. $10,000
B. $4,000
A partner’s basis in property received in a nonliquidating distribution is the same as the partnership’s basis immediately before the distribution. However, the partner’s basis in the property may not exceed his/her basis in the partnership less any cash received in the distribution.
Hart received property with a basis of $12,000 ($5,000 in cash plus the partnership’s basis in the land of $7,000). However, his basis in the partnership interest is $9,000, so the basis in the property distributed must be limited to this amount. Since the distribution included $5,000 in cash, Hart’s basis in the land is $4,000 ($9,000 - 5,000).
On June 30, 2015, Berk retired from his partnership.
At that time, his capital account was $50,000 and his share of the partnership’s liabilities was $30,000. Berk’s retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2015.
Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income therefrom of
2015 2016 $13,333 $26,667 $20,000 $20,000 $40,000 - - $40,000
2015 2016
- $40,000
Gulde's tax basis in Chyme Partnership was $26,000 at the time Gulde received a liquidating distribution of $12,000 cash and land with an adjusted basis to Chyme of $10,000 and a fair market value of $30,000. Chyme did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was the amount of Gulde's basis in the land? A. $0 B. $10,000 C. $14,000 D. $30,000
C. $14,000
The basis in the partnership interest is first reduced to $14,000 for the cash distribution of $12,000 ($26,000 − $12,000 = $14,000). Generally, the $14,000 basis is then reduced by the basis that the land has to the partnership ($10,000). However, since this is a liquidating distribution the ending basis in the partnership interest must be zero. Therefore, the basis in the partnership interest is reduced by $14,000, and this becomes Gulde’s basis in the land.
On December 31, 2015, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities.
On that date, the adjusted basis of Clark’s partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory.
What is Clark’s gain or loss on the sale of his partnership interest?
A. Ordinary loss of $10,000. B. Ordinary gain of $15,000. C. Capital loss of $10,000. D. Capital gain of $15,000.
D. Capital gain of $15,000.
If a partner sells his/her interest in the partnership, the partner recognizes a capital gain equal to the amount that the payment exceeds the partner’s adjusted basis in the partnership.
Clark’s adjusted basis in the partnership is $40,000 immediately before the sale. The assumption of Clark’s share of the partnership’s liabilities is viewed as a distribution to Clark. Thus, Clark’s adjusted basis must be reduced by the assumption of his share of the partnership’s liabilities, putting his adjusted basis at $15,000. The payment of $30,000 received by Clark exceeds his adjusted basis of $15,000 by the amount of $15,000. Hence, Clark must recognize a capital gain of $15,000.
On January 3, 2015, the partners’ interests in the capital, profits, and losses of Able Partnership were:
% of capital, profits and losses
Dean 25%
Poe 30%
Ritt 45%
On February 4, 2015, Poe sold her entire interest to an unrelated party. Dean sold his 25% interest in Able to another unrelated party on December 20, 2015. No other transactions took place in 2014. For tax purposes, which of the following statements is correct with respect to Able?
A. Able terminated as of February 4, 2015. B. Able terminated as of December 20, 2015. C. Able terminated as of December 31, 2015. D. Able did not terminate.
B. Able terminated as of December 20, 2015.
Able Partnership terminated for tax purposes on December 20, 2015, the date that over 50 percent of the partnership’s interest had been exchanged in past twelve months.
The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, 2014: Assets Adjusted basis per book Market value Cash $102,000 $102,000 Unrealized accounts receivable -- 420,000 \_\_\_\_\_\_\_ \_\_\_\_\_\_\_ Totals $102,000 $522,000 Liability and Capital Note payable $ 60,000 $ 60,000 Capital accounts: Allen 14,000 154,000 Baker 14,000 154,000 Carr 14,000 154,000 \_\_\_\_\_\_\_ \_\_\_\_\_\_\_ $102,000 $522,000 Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2015. In addition, Dole assumed Carr's share of the partnerships liability. What amount of ordinary income should Carr report in his 2015 income tax return on the sale of his partnership interest?
A. $0 B. $20,000 C. $34,000 D. $140,000
D. $140,000
If a partner sells or exchanges his/her partnership interest and the partnership has either unrealized receivables or substantially appreciated inventory, the partner recognizes an ordinary gain to the extent that the amount realized by the partner due to the unrealized receivables or substantially appreciated inventory is greater than the partner’s basis in the items.
When Carr sold his partnership interest in Allen, Baker and Carr, the partnership had unrealized receivables. The amount realized by Carr due to the unrealized receivables was $140,000, the partnership’s total unrealized receivables of $420,000 multiplied by Carr’s one-third ownership interest.
Carr does not have any basis in the unrealized receivables (indicating that none of the receivables have been collected). Hence, Carr must report an ordinary gain of $140,000, the $140,000 realized by Carr due to the unrealized receivables less Carr’s basis in the receivables, which is zero.
A shareholder’s basis in the stock of an S corporation is increased by the shareholder’s pro rata share of income from
Tax-exempt interest Taxable interest
No No
No Yes
Yes No
Yes Yes
Tax-exempt interest Yes Taxable interest Yes
Income for an S corporation includes taxable and tax-exempt interest. All income of an S corporation is passed through to the shareholder and results in an increase in the shareholder’s basis in the stock of the corporation. The shareholder is responsible for any taxes that may or may not apply to the S corporation’s income.
An S corporation engaged in manufacturing has a year end of June 30. Revenue consistently has been more than $10 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year end. Which of the following statements is correct if it changes to a C corporation?
A. The year end will be December 31, using the cash basis of accounting.
B. The year end will be December 31, using the accrual basis of accounting.
C. The year end will be June 30, using the accrual basis of accounting.
D. The year end will be June 30, using the cash basis of accounting.
C. The year end will be June 30, using the accrual basis of accounting.
Once the S corporation completes the steps necessary to become a C corporation, it will be allowed to retain its June 30 year-end since C corporations are not subject to the tax-year limitations to which partnerships and S corporations are.
However, C corporations cannot use the cash method of accounting unless their average annual gross receipts for the previous three years do not exceed $5,000,000. Once the $5,000,000 test is failed the accrual method must be used for all future tax years. Since this corporation has had revenues of more than $10 million it must use the accrual method of accounting.
Which of the following items must be separately stated on Form 1120S, U.S. Income Tax Return for a Corporation, Schedule K-1?
A. Mark-to-market income.
B. Unearned revenue.
C. Section 1245 Gain.
D. Gain or loss from the sale of collectibles.
D. Gain or loss from the sale of collectibles.
Collectible gain is taxed at a maximum rate of 28% and can be offset with collectible losses, so it needs to be separately stated.
B Corporation has been a calendar-year S electing corporation since its inception. S1 and S2 each own half of the stock with a basis of $12 and $9, respectively. This year B reported ordinary income of $81 and $10 of tax-exempt income. B also made a $51 cash distribution to each shareholder at year end. What is S1's basis after the distribution? A. $ 1.5 B. $ 6.5 C. $52.5 D. $57.5
B. $ 6.5
S1’s beginning basis is $12. It is increased by 50% of the taxable and tax-exempt income (($81 + $10) * 50% = $45.50) and decreased by the $51 distribution.
$12 + $45.50 - $51 = $6.50
Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson's individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson's individual return? A. $28,000 B. $132,000 C. $160,000 D. $188,000
C. $160,000
The distributive share to Carson would be $400,000 × 40% = $160,000.
No reduction for dividends received.
If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder
A. Must be returned to the S corporation.
B. Increases the shareholder’s basis for the stock.
C. Decreases the shareholder’s basis for the stock.
D. Has no effect on the shareholder’s basis for the stock.
C. Decreases the shareholder’s basis for the stock.
A distribution from an S corporation that has no accumulated earnings and profits reduces the basis of a shareholder’s stock. If the payment exceeds the shareholder’s basis in the stock, it is viewed as a payment in exchange for stock.
Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker’s basis in Alpha Corp. was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for this year. Alpha distributed $30,000 in cash to Baker during the year.
What amount of the $30,000 cash distribution is taxable to Baker?
A. $0 B. $7,000 C. $4,000 D. $30,000
C. $4,000
Calculate basis in an S corporation as follows: The current basis of $25,000 is increased by the $1,000 of income to $26,000, then reduced for the distribution of $30,000 which would reduce the basis to $0 and produce a $4,000 gain. The $3,000 loss is suspended until there is more basis in the future.
If the amount of the distribution exceeds the adjusted basis of the stock, such excess shall be treated as gain from the sale or exchange of property.
A sole proprietorship incorporated on January 1 and elected S corporation status. The owner contributed the following assets to the S corporation:
Basis Fair market value
Machinery $ 7,000 $ 8,000
Building 11,000 100,000
Cash 1,000 1,000
Two years later, the corporation sold the machinery for $4,000 and the building for $110,000. The machinery had accumulated depreciation of $2,000, and the building had accumulated depreciation of $1,000. What is the built-in gain recognized on the sale?
A. $100,000 B. $ 99,000 C. $ 6,000 D. $0
D. $0
The built in gains tax applies only when an existing C corporation makes an S corporation election. The built in gains tax does not apply when a sole proprietorship makes an S election, so the correct answer is $0.
Prail Corporation is a C corporation that on February 1, 2015 elected to be taxed as a calendar-year S corporation. On June 15, 2015, Prail sold land with a basis of $100,000 for $200,000 cash. The fair market value of the land on February 1, 2015 was $150,000. Prail had no other income or loss for the year and no carryovers from prior years.
What is Prail’s tax?
A. $7,500 B. $17,500 C. $22,250 D. $35,000
B. $17,500
A C corporation that makes an S election and has unrealized built-in gains in its assets as of the election day must pay a built-in gains tax on this appreciation if it is recognized within the next 10 years.
When Prail makes the S election it has appreciation in the land of $50,000 ($150,000 - $100,000). Since the land was sold within 10 years of the election day, the first $50,000 of gain is taxed to the corporation at the rate of 35%.
Therefore, Prail must pay a tax of $17,500 ($50,000 * 35%).
Lyon, a cash basis taxpayer, died on January 15, 2015. In 2015, the estate executor made the required periodic distribution of $9,000 from estate income to Lyon’s sole heir.
The following pertains to the estate’s income and disbursements in 2015:
2015 Estate Income
$20,000 Taxable interest
10,000 Net long-term capital gains allocable to corpus
2015 Estate Disbursements
$ 5,000
Administrative expenses attributable to taxable income
For the 2015 calendar year, what was the estate’s distributable net income (DNI)?
A. $15,000 B. $20,000 C. $25,000 D. $30,000
A. $15,000
Since the $10,000 of net long-term capital gains is allocable to corpus and not required to be distributed to the beneficiary, it is excluded from distributable net income in this case. Thus, the estate’s distributable net income is $15,000, $20,000 of taxable income less $5,000 of administrative expenses attributable to taxable income.
Which of the following is(are) deductible on the fiduciary income tax return for a decedent’s estate?
I. Expenses of administering and settling the estate.
II. State inheritance or estate tax.
A. I only. B. II only. C. Both I and II. D. Neither I nor II.
A. I only.
Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible
A. Only on the fiduciary income tax return (Form 1041) and never on the federal estate tax return (Form 706).
B. Only on the federal estate tax return and never on the fiduciary income tax return.
C. On the fiduciary income tax return only if the estate tax deduction is waived for these expenses.
D. On both the fiduciary income tax return and on the estate tax return by adding a tax computed on the proportionate rates attributable to both returns.
C. On the fiduciary income tax return only if the estate tax deduction is waived for these expenses.
Jay properly created an inter vivos trust naming Kroll as trustee. The trust’s sole asset is a fully rented office building. Rental receipts exceed expenditures. The trust instrument is silent about the allocation of items between principal and income.
Among the items to be allocated by Kroll during the year are insurance proceeds received as a result of fire damage to the building and the mortgage interest payments made during the year.
Which of the following items is(are) properly allocable to principal?
Insurance proceeds on building Current mortgage interest payments No No No Yes Yes No Yes Yes
Insurance proceeds on building Yes
Current mortgage interest payments No
Only extraordinary items are allocated to principal; that is, payments that are made irregularly. Regular payments are allocated to interest.
The insurance proceeds are unusual and were made only once. They are allocated to principal. The interest payments are made at regular intervals and so are allocated to interest.
The Simone Trust reported distributable net income of $120,000 for the current year. The trustee is required to distribute $60,000 to Kent and $90,000 to Lind each year. If the trustee distributes these amounts, what amount is includible in Lind’s gross income?
A. $0 B. $60,000 C. $72,000 D. $90,000
C. $72,000
The amount of income recognized by the beneficiaries is the lower of the amount distributed ($150,000) or distributable net income ($120,000). Thus, Kent and Lind will recognize income of $120,000. Since they received total distributions of $150,000, the income recognized is 80% ($120,000/$150,000) of the amount received. Thus, Lind’s income is 80% x $90,000, or $72,000.
