Negative DNI; Income beneficiary not taxed?
Marie Murrell
of the trust, made him income beneficiary for life, and he
is the trustee. Her children are the remainder
beneficiaries and were the sucessor trustees. The only
assets to the trust are stocks, bonds, and a money market
account.
The children sued the income beneficiary, asking for monthly
statements and direct mailings of all accounts. The
children lost, and as well, the judge assinged a local bank
to be the sucessor trustee instead of the children (because
of their hostility toward the income beneficiary).
The attorney bills have been charged to principal and
created a NOL. The only other expenses were my accounting
billings and net capital losses associated with the sale of
stock to pay for the attorney bills.
The instrument is silent as to how to treat capital gains
and losses, but in the past, we have assigned the gains to
the principal, and all interest and dividends to the income
beneficiary.
This year, the interest and dividends are far less than the
expenses, creating zero distributable net income. With DNI
of zero there appears to be no income to report on a K-1,
and the NOL would carry back/over to the principal
beneficiaries.
Can the income beneficiary really receive all the dividends
and interest, and no K-1 be issued to him?
Marie L. Murrell, CPA
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Lin706
> expenses, creating zero distributable net income. With DNI
> of zero there appears to be no income to report on a K-1,
> and the NOL would carry back/over to the principal
> beneficiaries.
There is no NOL as to the expenses to carryback or over to
the principal beneficiaries. The capital loss from the sale
of securities will stay with the trust until there are
future gains or the trust eventually terminates.
> Can the income beneficiary really receive all the dividends
> and interest, and no K-1 be issued to him?
Yes, because the IRS permits the expenses to reduce the
income for tax purposes, even though for accounting purposes
the fees were charged to principal.
Dan Evans
> Client has a very simple trust.
Not sure what you mean by that.
If you're talking about a trust that is a "simple trust" in
the sense that it requires the distribution of all income
each year (see section 651), then the modifier "very"
doesn't apply, because the trust is either a simple trust,
or it isn't. It can't be "very simple" for the same reason
that a woman can be "very pregnant."
> The attorney bills have been charged to principal and
> created a NOL.
Not really. If you check section 172(d), you'll see that
you can't have a "net operating loss" with only nonbusiness
deductions.
To the extent that the deductions of a trust exceed the
income, the deductions are lost and do NOT carry forward.
> This year, the interest and dividends are far less than the
> expenses, creating zero distributable net income. With DNI
> of zero there appears to be no income to report on a K-1,
> and the NOL would carry back/over to the principal
> beneficiaries.
>
> Can the income beneficiary really receive all the dividends
> and interest, and no K-1 be issued to him?
Yes. When a trust has deductible expenses that are payable
from principal under state law, the trust will have "income"
under state law that is more than the DNI, and it is
possible for the DNI to be zero while the income
distributable to the beneficiary is still a positive number.
However, the deductions that reduce DNI to zero might not
reduce DNAMTI ("distributable net alternative minimum
taxable income") to zero, meaning that you may find that a
beneficiary still has AMT income without any regular income.
I believe you will find that in this case, the legal fees
incurred are deductible on line 15a, not 15b, and so are not
"miscellaneous itemized deductions" and are deductible for
AMT purposes as well as regular tax purposes.
(I am assuming that the legal fees are properly payable by
the trust and not the beneficiary, are properly payable from
principal and not income, and are deductible under section
212.)
Marie Murrell
> If you're talking about a trust that is a "simple trust" in
> the sense that it requires the distribution of all income
> each year (see section 651), then the modifier "very"
> doesn't apply, because the trust is either a simple trust,
> or it isn't. It can't be "very simple" for the same reason
> that a woman can be "very pregnant."
How correct you are! This is a very simple "complex" trust!
In an effort to be concise, I lost accuracy. The only
reason this is a complex trust, is because the income
beneficiary can invade corpus of 5% per year. Of course the
income beneficiary chooses to do so.
>> The attorney bills have been charged to principal and
>> created a NOL.
>
> Not really. If you check section 172(d), you'll see that
> you can't have a "net operating loss" with only nonbusiness
> deductions.
Thank you for pointing this out! I was confusing a NOL with
a capital loss carryforward. Sometimes I can't see the
forest for the trees.
> I believe you will find that in this case, the legal fees
> incurred are deductible on line 15a, not 15b, and so are not
> "miscellaneous itemized deductions" and are deductible for
> AMT purposes as well as regular tax purposes.
>
> (I am assuming that the legal fees are properly payable by
> the trust and not the beneficiary, are properly payable from
> principal and not income, and are deductible under section
> 212.)
If the expenses are deductible under 212 wouldn't they have
to be taken on line 15b? Please clarify.
I originally wanted to deduct these expenses under line 14
(attorney, accountant, and return preparer fees). My
thinking was that these expenses would not have been
incurred had the assets not been in the trust. The 1041
instructions are clear that expenses paid in connection with
the administration of the trust that would not have been
incurred if the property were not held in the trust are NOT
miscellaneous itemized deductions subject to the 2% floor.
Can attorney bills only be deducted on line 14 if the trust
has an active trade or business? The only reason these
attorney bills accumulated was because the grantor's
children (the residual beneficiaries) thought they should
have some type of control, and monthly accountings during
the income beneficiaries life. The courts not only denied
all requests of the residual beneficiaries, but also took
away their successor trustee-ship (due to their hostility
toward the income beneficiary), and assigned a local bank as
successor trustee.
Please help me to determine on which line these attorney
bills should be deducted. Line 14, line 15a, or line 15b.
Thank You
Marie L. Murrell, CPA