Federal Taxation XII: Fiduduary, Tax Research/Practise Flashcards Preview

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Flashcards in Federal Taxation XII: Fiduduary, Tax Research/Practise Deck (31):


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

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



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.


Terminable Interest

An interest that ends upon occurrence of a contingency.



Person who receives property after present interest is terminated


Contingent Interest

Interest that is created upon occurrence of a contingency


Fiduciary: Single Taxation

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)


Simple Trust

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


Grantor Trust

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


Fiduciary: Personal Exemption

$600 for estates

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

$100 for all other complex trusts


Fiduciary: Standard Deduction

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


Fiduciary: Corpus

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


Fiduciary: Distributable Net Income (DNI)

Amount of accounting "income" available to be distributed

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


Fiduciary: Distributions of Income

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


Fiduciary: Calculation of DNI

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

= Distributable net income


Fiduciary Income Tax Formula

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

= Taxable Income


Income in Respect of a Decedent

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

Included in both estate income tax return and estate tax return


Expenses in Respect of a Decedent

Deductible expenses paid after the date of death.

Deducted on both estate income tax return and estate tax return


Primary Tax Authority

1. Legislative
2. Administrative
3. Judicial


Legislative Authority from Congress

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


Administrative Authority from Treasury Dept. and IRS

1. Treasury regulations
a. legislative
b. interpretive
c. procedural

2. Revenue rulings

3. Private letter rulings


Judicial Authority from a court of original jurisdiction

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


Penalty: Nonfiling

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


Penalty: Underpayment

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


Substantial Understatement

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


Substantial Misvaluation

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


Gross Misvaluation

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


Penalty: Fraud

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


Statute of Limitations

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)


Penalty Terminology

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


Preparer Penalty: Unreasonable Position

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


Marginal Tax Rate

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.