Discussion:Fidiciary fee subject to self employment tax

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Discussion Forum Index --> Basic Tax Questions --> Fidiciary fee subject to self employment tax


Discussion Forum Index --> Tax Questions --> Fidiciary fee subject to self employment tax

CA GIRL (talk|edits) said:

8 April 2010
Are fiduciary fees paid to a trustee subject to self employment tax? I have read Rev Rul 58-5 and Publication 559, page 3.

My client is not in the business of being a trustee; she is the decedent's daughter. The trust holds a rental property, which operates at a loss after depreciation. The trustee actively manages the rental property and takes the rental loss on the passive activity flowing from the K-1.

Is the rental property deemed to be a trade or business?? My feeling is that it is not a trade or business and thus the trustee fees are not subject to self employment tax.

Looking for someone out there to concur with my findings. Thank you in advance!!

Belle (talk|edits) said:

April 8, 2010
"...not in the business of being a trustee"

That's the key - not subject to S/E tax.

Taxea (talk|edits) said:

9 April 2010
Why do you feel it is not a trade or business? She is not the owner of the rental managing it herself. She is similar to a rental management agent of the trust.

She should do a Sch C reporting the income and expenses if she does this with continuity and regularity.

MWPXYZ (talk|edits) said:

9 April 2010
I concur with your findings, since even an operator of a rental property would not pay SE tax. The Publication seems pretty clear. The trustee is not subject to employment taxes (as an employee) as the courts have not wanted to delineate the fiduciary duties into operations and administration.

However a SCh C lawyer who ends up as a trustee of trusts on a continual basis would pay SECA.

MWPXYZ (talk|edits) said:

9 April 2010
And the examples in the Rev Rul should make your decision clear, I would think.

Dennis (talk|edits) said:

9 April 2010
Trustee commissions are a matter of state law. Statutory commissions received by a non-professional trustee are not subject to SE tax. The excess, however, of commissions paid over the statutory rates is subject. On the other hand if you are passing a rental loss onto a K-1 it is clear that nobody is watching and you can do whatever you want...♫

Harry Boscoe (talk|edits) said:

9 April 2010
"...it is clear that nobody is watching...." Precisely.

Taxea (talk|edits) said:

10 April 2010
Aren't trustee fees paid for administration of the trust...my thought is this goes beyond that

MWPXYZ (talk|edits) said:

10 April 2010
I believe in NH trustees are supposed to be paid what is reasonable and the lawyers have come up with a "reasonable" amount based on size of estate; and I suppose this applies to the executor.

Dennis - Is there a regulation/ruling/case that requires the payment of "commissions" in excess of statutory rates be subject to SE tax; or is this a common sense type reasoning?

You wouldn't pass through a rental loss would you, Dennis? You wouldn't disregard your duty to the "system"? How about pass on capital losses before termination of the trust/estate? My software seems to have a box to check - if i want to allocate capital losses to the beneficiaries. The losses are automatically allocated if i mark the final year box, but THIS box seems to be a special feature.

Taxea - I am thinking a trust itself is just a legal structure and there is little or nothing to administer unless the trust has assets. And the administration, or care, of those assets gets the trustee the fee. Whether the assets are cash, stocks, rental property, a small business, derivatives, etc. If the trust runs for several years and the trustee duties are significant, I suppose at that point one is involved in a trade or business as envisioned by Section 1402. However, i wonder if the trade or business of the trustee is "rentals from real estate" which is considered in 1402(a)(1). Or if, as you say, the trustee is in a separate business or is a separate entity other than the trust/estate and subject to SE tax on thier own merits. The reasoning in Rev Rul 58-5 indicates that the fiduciary cannot be an employee because the fiduciary is the controller of the entity, at least as long as the fiduciary is performing those taxsks relative to controlling the entity ( it's assets). I am thinking that reasoning would keep a fiduciary from being subject to any self employment tax; unless, the fiduciary does this type of work on a constant and time consuming basis. Conflicting legal theories that create more rules to properly report, i guess.

Dennis (talk|edits) said:

10 April 2010
From Revenue Ruling 58-5

EXAMPLE (1). Executor who receives a flat fee for administering the estate. A, a nonprofessional fiduciary, receives a flat $10,000 for administering the estate of B. B's gross estate is valued at $150,000 and includes a trade or business which A manages for the period of time required to distribute the assets of the estate. Under the laws of the State in which b's estate is probated, an executor is entitled to a five percent commission based upon the value of the assets distributed. Since A distributed the entire estate worth $150,000 he would have been entitled to $7,500 executor's commissions, based upon the statutory five percent allowance. Inasmuch as A, pursuant to court order, actually received $10,000 instead of $7,500 in commissions, the excess, or $2,500, is regarded as being attributable to the operation of the trade or business of the estate. A must therefore treat this $2,500 as earnings from self-employment. The remaining $7,500 is regarded as being attributable to the normal fiduciary duties of marshalling the assets of the estate and should not be treated as trade or business income. On the other hand, if A's total fee for administering the estate was equal to or less than $7,500 (the statutory executor's allowance in this case), and if nothing was said in the court order with respect to allocation of the fee, the entire fee would be regarded as being attributable to A's fiduciary activities and no part of the fee would be treated as trade or business income to A.

Distribution of loss on K-1 is not worthy of comment.

Harry Boscoe (talk|edits) said:

10 April 2010
And I hope I do not overstate our position when I note that we're still looking for the criteria that would determine whether a rental property is a trade or business or not.

Dennis (talk|edits) said:

10 April 2010
Doesn't matter, Harry. If fiduciary is paid extra to manage rental property he is in no different a position than any other paid manager.

Harry Boscoe (talk|edits) said:

10 April 2010
The cited rev rul had a trade or business in its facts. It matters very much. This is yet another tentacle of the conspiracy...

Dennis (talk|edits) said:

10 April 2010
The revenue ruling gave an example of being paid extra to perform services outside the normal fiduciary obligation. Business happened to be used in the example. Unless you are saying an apartment manager is not subject to fica...♫

Harry Boscoe (talk|edits) said:

10 April 2010
I'm distinguishing OP's facts from those in the Rev Rul. Why would I stick my neck out farther than that?

Oh, and pointing out the ubiquity of the conspiracy, too...

MWPXYZ (talk|edits) said:

10 April 2010
And i guess i have to rethink my way of looking at the situation. My foundation in this area had to do (a few decades ago) with dealing with a fiduciary, involved with a trade or business economic activity as an employee (and I will have to find that cite again) as it made clear that employee status was not possible. The reasoning had to do with the position of the fiduciary. Thus, when I read the revrul (up until the examples) noted that ALL 3 requirements needed to be met for SE tax to be considered I believed that Se tax would be unlikely. But Example 1 has created a chink in my certainty and example 3 actually has me a bit confused. Something to ponder after the 15th.

Dennis - Are you "with" the acounting firm featured in your cite?

MWPXYZ (talk|edits) said:

10 April 2010
"Distribution of loss on K-1 is not worthy of comment"

And, perhaps I am confused by this as well. But the software I have has in an "allocations" input sheet created a box, that if checked, will pass capital losses though to beneficiaries on a non-final return. I suppose this merely means that an estate/trust could be terminated, for tax purposes, in the penultimate year; while a final return is then needed to account for any oddball, insignificant issues?

As opposed to passing on capital losses during any year of the estate/trust.

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