tax for the entire year in which the death occurred must be paid by the personal representative, or if he is not liable the whole tax must be paid by the heirs or the devisees. But "heirs and distributees take property of the intestate subject to its liability for taxes.' § 208. Payment of Income Taxes to Date of Death Immediately after appointment and qualifying, and without waiting for the close of the taxable year, an executor or administrator must file a federal return of income for the decedent to the date of death, unless the decedent's income for the year or part of year to be covered in the return was less than the $1,000 allowed before a return need be filed. The period required to be covered by the return is usually from the beginning of the calendar year in which the death occurred, or it may cover a fiscal period beginning on a date other than January 1, if the last return filed by the decedent covered a period other than the calendar year. If the demise occurred after the close of a taxable period for which the decedent had not yet filed his return, it is necessary for the administrator or executor to file a return for that entire period as well as the return for the later fractional period. Forms 1040 (revised) and 1040A (revised) are used for this purpose. In making this return the administrator or executor reports exactly in the manner which the decedent himself would have been required to follow had he lived to make his own return. The income tax due from the decedent is a debt against the estate in the hands of the executor or administrator, and the executor or administrator is required to file the return for the decedent in order that the amount due to the government from the decedent's estate may be determined and paid.' The executor or administrator is entitled to claim for the decedent the full personal exemption to which he would have been entitled if he had lived to the end of the taxable year, no matter how small a portion of the year is covered by the return.' Whatever amount of tax is found to be due would be a preferred claim and is entitled to priority in payment. The state laws covering the payment of income taxes on behalf of deceased persons follow the same general principles as those of the federal law, but vary in detail in all the states having income tax laws. The payment of income taxes on an estate in process of administration or on a trust estate is a more complicated proceeding and will be treated in the two chapters following. REVIEW QUESTIONS 1. What are the preferred claims? How do taxes rank among these? 2. When are taxes on personalty a preferred claim? If taxes on personal property come due after the death of the testator, what is their status? When does double taxation arise? 3. Why are taxes due on realty paid from the personal estate? What exception to this rule is sometimes made? When would a representative pay taxes on realty assessed after the death of the testator? 4. Are taxes due on realty ever apportioned? What decides whether a land tax is paid by the representative or the heir? 5. What is the rule as to the payment of income tax? What is the rule as to exemptions? Article 305 of Regulations 45, Bureau of Internal Revenue. CHAPTER XXVII FEDERAL INCOME TAXES ON FIDUCIARIES § 209. Income Taxes Pending Distribution and Final Return An executor or an administrator, after having made the return of income to the date of death, must at the end of the decedent's taxable year make a report as a fiduciary if the net income of the estate is $1,000 or over, or if any beneficiary is a non-resident alien. Thereafter, within two and one-half months following the close of each taxable year he is required to make similar returns. Upon the completion of the administration of an estate and final accounting an executor or administrator shall file a return of income of the estate for the portion of the taxable year in which the administration was closed, attaching to the return a certified copy of the order for his discharge. An ancillary administrator need make no separate return if the domiciliary administrator includes in his return the entire income of the estate. Similarly, upon the termination of any other trust the trustee shall make a return without waiting for the close of the taxable year. In any such case the requirements with respect to the payment of the tax are the same as if the return were for a full taxable year closing at the end of the month during which the decedent dies or the estate is settled or the trust is terminated, as the case may be. The payment of the tax before the end of the taxable year in such circumstances does not relieve the taxpayer from liability for any additional tax which might subsequently be imposed upon income of the taxable year.1 § 210. The Duties of a Trustee as to Income Taxes Generally, the duties of a trustee or a guardian as to taxes and tax returns are the same as the duties of any careful busi 1 Article 442 of Regulations 45. ness man as to his own property. For purposes of the federal income tax, a trustee must report if the net income of the estate exceeds $1,000, or if any beneficiary is a non-resident alien. I there are two trustees it is enough if one of them makes a re turn. If the trustee is acting for an individual, as in the case of a guardian, he must make a return if the net income of the individual is in excess of $1,000 if single, and in excess of $2,000 if married and living with husband or wife. In such cases the return must state the items of the gross income and the deductions and credits allowed by law. The guardian of a minor must make the return and pay the tax unless the minor does this himself. The trustee of an insane or incompetent person must make the return and pay the tax. The law is not clear as to whether the trustee should in other cases pay the tax on income due by a resident beneficiary.2 In the case of non-resident aliens who are beneficiaries, the trustee's duty is positive. He must deduct and withhold from income payable to them a tax equal to 8 per cent thereof, regardless of the amount paid. All fiduciaries are likewise required to render returns of information to the Commissioner showing all payments of $1,000 or more in any taxable year to any beneficiary, and setting forth the amount of such payments in such form and manner as may be prescribed by the Commissioner.3 § 211. Returns of Income Rarely Correct So many of our population now pay an income tax that it would seem unnecessary to discuss here the general provisions of the law, especially as an adequate handling of this question alone would require a volume much larger than this. Within the last three years: ? Montgomery, Income Tax Procedure, 1921, pp. 1056, 1c57. The country has ceased to regard the income tax as a novelty and has accepted it as an institution. The American people have quickly accommodated themselves to the tax, have readily grasped the principles underlying it and have learned to perform measurably well the large part which is expected from them in its administration.* At the same time it is a fact that few returns of income to the federal government are correct. If too large a tax is paid the taxpayer is deprived of the interest on the money, and perhaps of the money itself if the error is not discovered. If he has paid too little he is subject to heavy penalties as well as being required to pay interest. § 212. Advantage of Expert Assistance The fact that so few returns are correctly made indicates that it would pay to employ someone expert in income tax matters to prepare the return. Expert assistance should be secured if there is any complication whatever, but it is as necessary to use great care in selecting an adviser in tax matters as it is in choosing a lawyer. The Commissioner of Internal Revenue has warned the public against a certain class of so-called "income tax experts." The maker of your income tax returns should be chosen with care. Select, if possible, a firm of certified public accountants which had an established reputation before the days when the income tax was the thing which induced people to keep books—a firm which has a reputation for ability in general accounting rather than one whose only field is the income tax. Avoid the "expert" who, before knowing anything about your business, is sure he can save you money. § 213. Administration of the Law The federal income tax law in force is the Revenue Act of 1918. It is administered by the Department of the Treasury of Montgomery, Income Tax Procedure, 1921. |