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gregmey
gregmey, CPA
Category: Tax
Satisfied Customers: 146
Experience:  Certified Public Accountant & Certified Financial Planner
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what is section 512 of the tax code (related to section 66

Resolved Question:

what is section 512 of the tax code (related to section 664)
Submitted: 2 years ago.
Category: Tax
Expert:  gregmey replied 2 years ago.
Hi, If a CRUT has Unrelated Business Taxable Income (UBTI) in any given year, the trust is subject to tax on ALL income for that year Treas Reg 1.664-1(c). If there is UBTI the tax due is calculated under the complex trust rules. Therefore, any distribution to the beneficiaries would be deductible as a distribution deduction to the trust. Any income left after the distribution deduction is taxable at the trust level.

Let me know if you have any further questions.

Thanks,

Greg
Customer: replied 2 years ago.

Note: I sent this reply(question) via Email which was probably incorrect---I was confused as how to send a follow-up question.

Anyway, the question is:

 

Since complex trust rules would apply, does that mean that I file a 1041 rather then the normal 5227 or both? And apparently, a form 4720 is also required to compute the tax. But where in the instructions (1041 or 4720) does it specify that the distribution to the beneficiary is deductible? And finally, is the amount of (presumed) excise tax equal to the "net" income (after distribution to the beneficiary)?

 

Sorry for the confusion,

 

XXXX XXXX

Expert:  gregmey replied 2 years ago.
Hi Larry, You need to post questions in the chat in order for me to see them.

Even though the complex trust rules apply you do not need to file Form 1041. You will need to file Form 4720 and Form 5227. Refer to the instructions of Form 5227 pg 4 section G.

http://www.irs.gov/pub/irs-pdf/i5227.pdf

There is an example in the Treasury Regulations 1.664-1(c) that shows you can deduct the distribution deduction. I don't see an explanation of this in the form instructions.

Yes, the amount of excise tax is equal to the net income after the distribution deduction.

Thanks,

Greg

Customer: replied 2 years ago.

And-----one final question !!

 

The K-1's in question (qty 2) identify the "unrelated taxable business income" as negative numbers, in both blocks 1 and 20. (Presumably, the negative "ordinary income" in block 1 will pass through to me as a passive loss on Schedule E)

 

But I digress---Even though the UTBI is negative, does the excise tax still apply?

Note: Maybe this is the reason for the IRS to impose this tax via Form 4720 !!??

 

Please answer/comment on the foregoing.

 

Thank you in advance for your assistance---You've been very helpful!!!

 

XXXX XXXX

Expert:  gregmey replied 2 years ago.
Hi Larry,

The UBTI is taxable at the CRUT not to the income beneficiary. The beneficiary will recognize income from the CRUT distributions based on the following ordering rules in Reg. §1.664-1(d)(1)(i):

1) Ordinary Income
2) Capital Gains
3) Tax Exempt Income
4) Return or principal

The UBTI income makes the CRUT a non-tax exempt entity for the year but it does not change the income classification for the beneficiary.

I hope this answers your question.

Thanks,

Greg
Customer: replied 2 years ago.

Greg---

 

Sorry for this "reply" but------as asked in my most recent inquiry, "Even though the UTBI is negative, does the excise tax still apply?"

 

i.e. in blocks 1 and 20 on the K-1 to the CRUT (issued by the company in which the CRUT is invested), the number is XXXXX!! (specfically -$8,296.00)!!

 

Correspondingly, does the excise tax apply to both positive and negative amounts? I am confused on this, since I've never encountered this UTBI problem before.

 

Your most recent correspondence did not seem to address this question.

 

XXXX XXXX

Expert:  gregmey replied 2 years ago.
I'm sorry I misunderstood what you were asking.

In this situation the excise tax on the CRUT does not apply because there is no Unrelated Business Taxable Income (UBTI) this year. The K-1's are reporting a $8,296 loss. The excise tax does not apply to negative amounts.

Again, sorry for misunderstanding your original question.

Thanks,

Greg

gregmey, CPA
Category: Tax
Satisfied Customers: 146
Experience: Certified Public Accountant & Certified Financial Planner
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