C14-32 Tax on $8,100 (see inside back cover) $2,287.00

Tax on $9,900 at 39.6% 3,920.40

Total tax $6,207.40

Incidentally, the tax is substantially higher than the 15% tax that an individual would pay on $18,000 of taxable income. p. C14-9.

C14-33 a. Dividends $30,000

Long-term capital gain 12,000

Minus: Trustee's fees ( 1,500)

Distribution deduction (28,500)^a

Personal exemption ( 300)

Taxable income $11,700

^aLimited to: $30,000 - $1,500 (trustee's fees) = $28,500.

pp. C14-7 through C14-11.

b. Capital gain $12,000

Minus: Personal exemption ( 300)

Taxable income $11,700

p. C14-17.

C14-34 DNI is $10,000 greater because of the tax-exempt income, but the taxable income would still be $11,700 because the $10,000 of tax-exempt interest is not included in gross income, and no distribution deduction is available for the tax-exempt interest (net of the trustee's fee allocable thereto). A portion of the trustee's fee, $375 [$1,500 x ($10,000/$40,000)], is nondeductible because it must be allocated to the tax-exempt income. The distribution deduction is increased by $375 from $28,500 to $28,875 ($30,000 dividends - $1,125 deductible trustee's fee). The net change to taxable income is therefore zero. The effect of the tax-exempt income on taxable income can also be verified by using the short-cut method. pp. C14-15 and C14-16.

C14-35 a. Corporate bond interest $30,000

Long-term capital gain 8,000

Minus: Trustee's fee (1,200)^a

Distribution deduction (28,800)^b

Personal exemption ( 300)

Taxable income $ 7,700

^a$2,000 - [$2,000 x ($20,000/$50,000)] = $1,200

^b$30,000 - $1,200 = $28,800

b. Tax on $5,950 (see inside back cover) $1,513.00

Tax on $1,750 at 36% 630.00

Total tax $2,143.00

pp. C14-7 through C14-11.

c. The tax consequences will not be any different. The distribution to the beneficiary, however, will be $2,000 smaller because the fee will reduce net accounting income and, thereby, the amount distributed. p. C14-10.

C14-36 a. Dividends $40,000

Minus: Trustee's fees charged to income ( 2,000)

Amount to be distributed $38,000

b. Long-term capital gain $15,000

Minus: Personal exemption ( 300)

Taxable income $14,700

pp. C14-7 through C14-11.

C14-37 a. Its distribution deduction is $16,000, the DNI amount.

b. Its distribution deduction is $14,000 ($16,000 DNI - $2,000 net tax-exempt income included therein).

c. Its distribution deduction is $9,000, the amount distributed (which is lower than DNI.)

pp. C14-22 and C14-23.

C14-38 Roy reports $12,000 [$36,000 x ($20,000/$60,000)].

Sandy reports $24,000 [$36,000 x ($40,000/$60,000)].

pp. C14-22 through C14-23.

C14-39 Sandy reports:

Mandatory distribution (tier-one) $10,000

Discretionary distribution (tier-two)

($36,000 - $10,000) x ($30,000/$50,000) 15,600

Total $25,600

Roy reports:

Discretionary distribution (tier-two)

($36,000 - $10,000) x ($20,000/$50,000) $10,400

pp. C14-24 and C14-25.

C14-40 Dividends $12,000

Tax-exempt interest 5,000

Rental income 3,000

Minus: Property taxes ( 200)

Net accounting income $19,800

The maximum distribution is $19,800, the net accounting income. pp. C14-5 through C14-7.

C14-41 a. $1,200 x ($5,000/$20,000) = $300 nondeductible fee.

The deductible fee is $900 ($1,200 - $300).

b. Dividends $12,000

Capital gain 20,000

Rental income 3,000

Minus: Property taxes ( 200)

Trustee's fee ( 900)^a

Personal exemption ( 300)

Taxable income exclusive of

distribution deduction $33,600

c. Taxable income exclusive of

distribution deduction $33,600

Plus: Personal exemption 300

Net tax-exempt income 4,700^b

Minus: Capital gain (20,000)

DNI $18,600

d. Dividends $12,000

Capital gain 20,000

Rental income 3,000

Minus: Property taxes ( 200)

Trustee's fee ( 900)

Distribution deduction (13,900)^c

Personal exemption ( 300)

Taxable income $19,700^d

^a$1,200 x ($15,000/$20,000) = $900

^b$5,000 - $300 = $4,700

^c$18,600 DNI - $4,700 net tax-exempt income = $13,900.

^dVerification: $20,000 capital gain - $300 exemption = $19,700 taxable income.

pp. C14-14 through C14-18.

C14-42 If the trust only makes a discretionary distribution of $8,000, the answer to part a will not change. The answer to part b will be $200 higher because the personal exemption will be $100 (instead of $300). The details in part c will be different because of the lower exemption, but DNI will not change. The answer to part d will change as follows:

The trust distributes 43.01075% ($8,000/$18,600) of its DNI and thereby 43.01075% of its net tax-exempt income. Its distribution deduction would be as follows:

Amount distributed $ 8,000

Minus: Net tax-exempt income deemed

distributed (0.4301075 x $4,700) ( 2,022)

Distribution deduction $ 5,978

d. Dividends $12,000

Capital gain 20,000

Rental income 3,000

Minus: Property taxes ( 200)

Trustee's fee ( 900)

Distribution deduction ( 5,978)

Personal exemption ( 100)

Taxable income $27,822

pp. C14-21 through C14-25.

C14-43 Property taxes $ 500

Maintenance of rental property 1,300

CPA's fee 700

Trustee's fee 1,350^a

Total $ 3,850

^a$1,800 - [$1,800 x ($7,000/$28,000)] = $1,350 deductible portion

pp. C14-15 and C14-16.

C14-44 A $3,000 loss is potentially deductible on the 1996 return. Because the trust is a simple trust and distributes all of its income, the capital loss produces no tax benefit. Thus, there is a $10,000 capital loss carryover to the 1997 return. The $10,000 loss is offset against the $15,000 capital gain on the 1997 fiduciary return. p. C14-18.

C14-45 $3,000 of the capital loss is offset against the $8,000 corporate interest income on the 1996 return. The remaining $7,000 loss is carried over to the 1997 return and offset against the $15,000 capital gain. p. C14-26.

C14-46 a. Gain subject to Sec. 644 tax $50,000

Times: Chris's marginal rate on capital

gains (maximum c/gain rate) x 0.28

Sec. 644 tax $14,000

b. The gain included in the trust's taxable income is $90,000 ($140,000 total gain - $50,000 Sec. 644 gain). pp. C14-32 and C14-33.

C14-47 a. There would be no Sec. 644 tax because the sale occurred more than two years after the transfer to the trust. The gain included in the trust's taxable income would be $140,000, the entire gain.

b. There would be no Sec. 644 tax because on the day of the transfer the property's FMV did not exceed its adjusted basis. The gain included in the trust's taxable income would be $70,000 ($150,000 - $80,000). pp. C14-32 and C14-33.

C14-48 Because the trust is revocable, the dividends and the capital gain are taxed to the grantor, Amir. None of the income is taxed to the trust or its beneficiary Ali. p. C14-37.

C14-49 The $20,000 of dividends are taxed to the son, Jack, the beneficiary. The $18,000 capital gain is taxed in the current year to Holly, the grantor, because she will receive the property upon the trust's termination. The reversion occurs more than ten years after the date of transfer and so the grantor escapes the reversionary interest rules under prior law. pp. C14-37 and C14-38.

C14-50 a. The reversion occurs within ten years; thus, the dividends are taxed to Holly, the grantor. Because the gains are held for ultimate distribution to Holly, the grantor, they are also taxed to Holly.

b. This trust is governed by the new tax rules, under which Holly, the grantor, is taxed on both the dividends and the gain. pp. C14-37 through C14-38.