Discussion:Satisfaction of simple trust income with distribution of in kind property
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Discussion Forum Index --> Tax Questions --> Satisfaction of simple trust income with distribution of in kind property
| 25 June 2007 | |
Hi we have been cussing and discussing the tax effects of the following transaction.
I have a simple trust, income/DNI required to be distributed of $5000. Distributions of principal are discretionary. I am going to satisfy that with a distribution of stock FMV of $20000 and a basis of $5000. We have reviewed reg 1.661(a)-2(f) that states if in kind distributions are made in satisfaction of the benes right to income gain or loss is recognized by the trust. I am also aware of in a complex trust rules stating for carrying out DNI the basis of the stock is used and no gain or loss is recognized by the trust unless an election is made. 643(e)(3). what answer do we get? 1) no tax on the gain at the trust level due to basis satisfies the DNI pass out. 2) $15000 capital gain at the trust level. 3) prorate the $20000 distribution to recognize gain on the 25% of stock that satisfies the reguired income distribution. Therefore recognize gain on $5000 fmv less basis of $1250. Gain at the trust level of $3750. | |
| 25 June 2007 | |
| You have a complex trust, not a simple trust. A simple is not allowed to distribute principal until it is closed. A complex trust has the option to do so. | |
| 26 June 2007 | |
| I wouldn't exactly call it prorating, Wes. You have a $5K distribution in kind that requires gain recognition at the trust level and carries the $5K in income and a discretionary distribution which can be passed at basis. It's easier to see if you look at the distribution as if these were two separate assets instead of one, say $5K in stock and a house. | |
| 26 June 2007 | |
| Hi Birg a trust that requires all fiduciary accounting income to be distributed currently can be a simple trust even though the instrument permits principal to be distributed, As long as the principal is not actually distributed, the trust is a simple trust for that year. Such a trust can be a simple trust in one year and a complex trust in the next year(when it distributes principal).
Hi Dennis thanks for your thoughts. I was hedging towards the "proration" have you ever seen an example anywhere in the regs or an article with similar facts. We searched RIA and several trust level books to no avail. So we have $5K of income passed out and now $3750 of CG taxed at the trust level. bye | |
| 26 June 2007 | |
| Nothing other than what you've already cited. To see it working, consider a trust that has $20K in income and a requirement to distribute $5K. Absent the §643 election the discretionary distribution at basis will carry only $3,750 in income. | |
| 27 June 2007 | |
| This is really 2 distributions rolled into one. The first distribution is the $5,000 distribution of income. The second distribution is the $15,000 of corpus. Basis on the $5,000 distribution would appear to be 25% of total basis.
Quoting from Rev. Rul. 67-74, “the transaction is treated as though the trustee had actually distributed to the beneficiary cash in an amount equal to the trust income required to be distributed currently, and the beneficiary had purchased the stock from the trustee with cash.” | |
| 27 June 2007 | |
| thanks riley for the cite. shot a 45 for nine in our 90+ weather. bye | |
