of the year. In making this later return he is allowed to claim an exemption of a full $1,000 for the remaining portion of the first year, and an exemption of $1,000 for each year or fraction of a year for which he must afterward file returns. If the decedent's income for the part of the last year of his life. was so low that the representative was not required to file a return, he need not make any return for him nor is he required 'o account for such: .. unreported income when he reports for the estate and its beneficiaries. Such income is entirely ignored so far as the income tax is concerned." § 227. Deductions Allowed in Determining Net Income The expenses necessarily incurred in the management of the property of an estate are ordinarily deductible to the same extent as for individuals. There are a few exceptions, however, which should be noted. The initial expenses of the administration of the estate, such as court costs, attorneys' fees, executors' commissions, etc., which are properly chargeable against the corpus of the estate (see § 110), are not allowable deductions in computing the net income of the estate. In the same way state inheritance taxes are not deductible when these taxes are payable from the corpus or principal, but if the statutes of a state require them to be satisfied from the income of the estate, they may be deducted from income in computing the taxable amount. It is permissible for every fiduciary to deduct a proper amount for the depreciation sustained during the taxable year, but a beneficiary is not permitted to claim such a deduction on assets of the estate. In lieu of the deduction for contributions allowed individuals, fiduciaries may deduct any amount: 18 Montgomery, Income Tax Procedure, 1921, p. 1035. which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, or any corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children and animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual." The amount of undistributed net income which is retained and permanently set aside for certain charitable and educational organizations designated by the will of a decedent, which were in existence at the time such income was permanently set aside, and was then reinvested for the estate, falls within the meaning and intent of . . . the Revenue Act of 1918. . . . Therefore the income so permanently set aside, retained, and invested by the executors and trustees is not subject to tax. This does not, however, apply to income set aside for the benefit of an organization not fully in existence as to which no deduction is authorized."5 § 228. Deductions for Losses Any loss resulting from the sale of stocks, bonds, or other property constituting a trust asset, is under all circumstances an allowable deduction from the gross income of the trust if such a loss would be an allowable deduction from the gross income of an individual, but is not allowable as against the current or future gross income of the present beneficiaries or of those who will receive the property at the termination of the trust. In other words, the regulations hold that if the trust suffers a loss in excess of its income for the year, the beneficiaries are not, under the regulations, allowed to deduct their pro rata shares of the loss from their income from other sources. It is doubtful if this provision could be enforced in 14 Revenue Act of 1918, § 219. 18 Recommendation 280 of the Committee on Appeals and Review, Bureau of Internal Revenue. court. This is one of those many cases, where the rights of the taxpayer must wait on the decisions of the courts. § 229. Computation of Tax The tax payable by a fiduciary is computed in the same manner and with the aid of the same sliding scale of rates as for individuals. These rates are shown on the forms used for the preparation of the returns. When the tax has been computed, there may be deducted from it the amount of income or profits taxes paid during the taxable year to foreign countries and possessions of the United States. § 230. Certain Penalties Not Applicable The estate of a deceased person, regardless of the date of his death, or of an insane or insolvent person, cannot be charged with liability to the 5 per cent penalty on account of his or the fiduciary's delinquency in making payment of taxes.1 Estates of decedents are also exempt from the interest at the rate of 1 per cent a month, which is imposed if the tax remains unpaid after ten days' notice and demand, and from the 6 per cent interest added when claims for abatement are disallowed, except that exemption from penalty does not extend to a decedent's estate when claim for abatement on the ground of loss in inventory is disallowed. § 231. Exemption Allowed Surviving Husband or Wife If a husband or wife . . . dies and the joint personal exemption is used by executor or administrator in making a return for the decedent, an undiminished personal exemption according to the status of the survivor at the end of the taxable year may be claimed in the survivor's return." 10 Article 1006 of Regulations 45. § 232. Returns of Information Another form which fiduciaries are required to fill out is Form 1096 (revised), which is really a letter of transmittal accompanying Form 1099 (revised), which must also be used. On these forms it is required that: All individuals, corporations, and partnerships, in whatever On this same Form 1099, fiduciaries are requested to prepare: ... . . reports for each beneficiary of the estate or trust, showing in every case the distributive shares of the members or beneficiaries, whether or not actually distributed." Such reports on Form 1099 (revised) are to be filed with the collector with the returns of income, instead of being transmitted to the Commissioner accompanied by Form 1096 (revised). § 233. Fiduciaries as Withholding Agents When a fiduciary pays rent, salary, interest, or other fixed or determinable income to non-resident aliens, he acts in the capacity of a withholding agent, and is subject to the law's general specifications covering withholding agents. A citizen or resident fiduciary who has the distribution of trust income for which there is a non-resident alien beneficiary, 18 Revenue Act of 1918, § 256. must make an income tax return for each such non-resident alien and pay the tax. But when the fiduciary distributes any part of the principal or corpus of the estate, no tax is due, as the tax is deducted only on income payments. Since gifts, bequests, and legacies are not taxable income, property coming to the estate in that manner may be distributed among the beneficiaries without regard to the tax. But of course profit arising from the ownership of such property is taxable, and must be paid by the legatees. Since the provisions covering fiduciaries as withholding agents are the same as for other withholding agents, they will not be commented on here beyond calling attention to them. § 234. State Income Tax Laws There have been a number of attempts at the establishment of the income tax as a means of raising revenue for state use, but the first of these was so disastrous that it required Wisconsin, that forerunner in matters of well-thought-out legislation, with a law passed in 1911, to prove that state income taxes were feasible. Since that time a number of other states, including Connecticut, Massachusetts, and New York, have adopted laws taxing incomes. Other states may be expected to do likewise. There are many differences among these various laws and between these laws and the federal law, and amendments are frequent. It will be necessary in each case to consult the state enactments on this subject, in states in which an income tax law exists. § 235. Bibliography Persons interested are referred to the following books and articles: Montgomery, R. H. Income Tax Procedure. Ronald Press Company, 1921. Holmes, G. E. Federal Income Tax. Bobbs-Merrill Company, 1920. |