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Income subject to tax.

(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;

(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;

(3) Income held for future distribution under the terms of the will or trust; and

(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.

Returns of income to be made by fiduciaries.

(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212,5 ....

REGULATION. The "period of administration or settlement of the estate" is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether longer or shorter than the period specified in the local statute for the settlement of estates. Where an executor, who is also named as trustee, fails to obtain his discharge as executor, the period of administration continues up to the time when the duties of administration are complete and he actually assumes his duties as trustee, whether pursuant to an order of the court or not. .... (Art. 343.)

Return to show beneficiary's distributive share of net income.

Law. Section 219. (b).... and in cases under paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of each beneficiary's distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made.

REGULATIONS. In the case of (a) estates of decedents before final settlement and of (b) trusts, whether created by will or deed, for accumulation of income, whether for unascertained persons or persons with contingent interests or otherwise, the income is taxed to the fiduciary as to any single individual, except that from the income of a decedent's estate there may first be deducted any amount

'Section 212 relates to net income of individuals.

of income properly paid or credited to a beneficiary. .... Where under the terms of the will or deed the trustee may in his discretion distribute the income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion. The imposition of the tax is not affected by the fact that an ultimate beneficiary may be a person exempt from tax. A statutory allowance paid a widow out of the corpus of the estate is not deductible from gross income. As an intestate's real estate does not pass to his administrator, upon a sale by the heirs, whether before or after settlement of the estate, each heir is taxed individually on any profit derived. (Art. 342.)

While certain estates and trusts are subject to tax as such and others are not, the fiduciary in every case is required to make a return of income..... (Art. 341.)

Grantor taxable on income of revocable trust.

REGULATION. The income of a revocable trust must be included in the gross income of the grantor. (Art. 341.)

The foregoing regulation is of interest to taxpayers who have created revocable trusts on the assumption that the tax on the income from the trust will be imposed upon the beneficiary.

The theory of the regulation is that it is a gift. If the grantor in such cases were permitted to exclude such income from his gross income, it would result in “wholesale” evasions of taxes, especially where taxpayers are subject to high surtax.

When tax is payable by the fiduciary.

Law. Section 219. (c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary.

Payments to beneficiaries during period of administration not taxable to fiduciary..... in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary.

'Fiduciaries are classed as individuals, so that payments of the tax must be made as provided in the case of individuals. (See page 176.)

Credits allowed when tax is payable by the fiduciary.In such cases (paragraph (1), (2) or (3) of subdivision (a)] the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.7

REGULATION. (a) In the case of an estate or trust taxed to the fiduciary it is allowed the same credits against net income as a single person, including a personal exemption of $1,000, but no credit for dependents. .... (Art. 346.)

Income taxable to beneficiary.

Law. Section 219. (d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary's net income is computed.

REGULATION. In the case of (a) a trust the income of which is distributable periodically, (b) an ordinary guardianship of a minor, and (c) an estate of a decedent before final settlement as to any income properly paid or credited as such to a beneficiary, the income is taxable directly to the beneficiary or beneficiaries. Each beneficiary must include in his return his distributive share of the net income, even though not yet paid him, but if the taxable year on the basis of which he makes his returns fails to coincide with the annual accounting period of the estate or trust, then he need only include in his return his distributive share for such accounting period ending within his taxable year. The regulations governing partnerships are generally applicable to such an estate or trust. .... (Art. 345.)

"The credits so specified in section 216 are: (1) dividends, (2) interest on United States government bonds and bonds of the War Finance Corporation, (3) an exemption of $1,000.

Beneficiary to receive credit for proportionate share of dividends, etc.

Law. Section 219. (d) .... In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions. (a) and (b) of section 216 as are received by the estate or trust.

REGULATION. .... (b) In the case of an estate or trust taxed to the beneficiaries each beneficiary is allowed for the purpose of the normal tax, in addition to his individual credits, his proportionate share of such dividends from domestic and resident foreign corporations and of such interest not entirely exempt from tax upon obligations of the United States and bonds of the War Finance Corporation as are received by the estate or trust. Each beneficiary is entitled to but one personal exemption, no matter from how many trusts he may receive income. .... (Art. 346.)

Returns may be made on basis of accounting period other than calendar year.

Law. Section 212. [Individuals) .... (b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer;

The section is applicable to fiduciaries, because of the definition of taxpayer given in the law, viz., “The term 'taxpayer includes any person, trust or estate subject to a tax imposed by this Act” (section 1).

Receivers are not all classed as fiduciaries.
Law. Section 239. .... In cases where receivers, trustees in

*[Former Procedure] In the 1913 law no mention was made of receivers for corporations, and it was contended that such receivers and the corporations whose property they administered were not subject to the income tax. A federal district judge in the northern district of California upheld this contention, but the Treasury never recognized it and, on the contrary, held the receiver to be liable for the income tax on the net income arising and accruing during his incumbency, even though such income was used, under orders of the court, to pay the debts of the corporation, or retained by him pending orders of the court as to its disposition. These conflicting holdings of a judge of a lower federal court and of the Treasury leave the intent of the 1913 law very much in doubt, but it is certain that the language of the 1916 law confirms the position taken by the Treasury.

bankruptcy, or assignees are operating the property or business. of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control."

Liability for tax on estate or trust.

REGULATION. Liability for payment of the tax attaches to the person of an executor or administrator up to and after his discharge, where prior to distribution and discharge he had notice of his tax obligations or failed to exercise due diligence in determining whether or not such obligations existed Liability for the tax also follows the estate itself, and when by reason of the distribution of the estate and the discharge of the executor or administrator it appears that collection of the tax can not be made from the executor or administrator, the legatees or distributees must account for their proportionate share of the tax due and unpaid. The same considerations apply to other trusts. Where the tax has been paid on the net income of an estate or trust by the fiduciary, such income is free from tax when distributed to the beneficiaries. (Art. 344.)

Income of a trust estate accumulated over a period of years before distribution.—The following ruling covers a case in which there was a delay in preparing the annual returns. During the years of the delay, income was accruing but was not paid. The beneficiary was known and, as the annual income was less than $20,000 but the aggregate which had accrued was more than $20,000, it was important that the income for each year should be reported separately.

Ruling. This office is in receipt of your letter, March 13, 1917, in which you advise that a resident of New York died in September, 1913, leaving a will by which he devised and bequeathed three-fourths of his estate to his three sons absolutely and one-fourth to a trust company in trust to pay the income therefrom to a daughter during her life, remainder to her issue; that it was impracticable for the executors to complete distribution of the estate or determine the amount of net income until 1916, when an account was prepared showing the net income accruing to each beneficiary during the last three months of 1913 and during the years 1914 and 1915, and that a large part of the accumulated income was distributed in 1916.

'See page 868, where this point is elaborated.

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