DEATH OF A TAXPAYER

1
DEATH OF A TAXPAYER

• CHAPTER 12
• PAGE 563

2
Upon Death Taxpayer Assets Pass p. 563

• Under laws of descent and distribution
• Under terms of will
• Under terms of trust
• By operation of property law
• By contract

3
For income tax purposes the income and expenses
from the assets must be reported p. 563

• Earnings from the investments
• Gain on sales
• Income earned by the decedent which has not yet
  taxed (Income in Respect of Decedent IRA)

4
Income is reported on p. 563

• Decedents income tax return
• Decedents estate income tax return
• A trust income tax return
• Or by a beneficiary

5
Tax Returns Completed in this Chapter

• Joint tax return of decedent and spouse (year of
  death)
• Estate tax return (short year)
• Estate tax return (final)
• Trust tax return (year of death)
• Spouse tax return (year after death)
• Trust tax return (year after death)
• Trust beneficiary tax return

6
Case Study p. 564

• Joe Brown died March 12, 2003
• Survived by wife, Ginny and three adult children
• Assets owned by Joe pass to his wife and to a
  Trust

7
Case Study, cont. p. 564

• Joe and Ginny lived in Wisconsin, a community
  property state
• Moved to Wisconsin and took non farm jobs
• Prior to moving to Wisconsin they lived in Iowa
  and farmed as a sole proprietorship for 30 years.
  
• Income was reported on Joes schedule F
• Farm in Iowa was purchased in 1960 as joint
  tenants

8
Case Study, cont. P. 564

• Wisconsin a Community Property State
• assets purchased with income earned by either
  spouse while in Wisconsin are Community Property.
• assets purchased as joint property are Community
  Property
• assets purchased before moving to Wisconsin
  retain ownership characteristics of that state

9
Case Study cont. P. 564

• After moving to Wisconsin the Iowa farm was 50-50
  share rented
• Neither Joe or Ginny materially participated in
  the farm operation
• They did actively participate for purposes of
  passive loss rules.
• Iowa tenant had an option to purchase the farm
  for 400,000 which he exercised on March 1, 2004.

10
Case Study cont. P. 564

• Joe also owned a 40 acre farm in Minnesota
• This farm has been cash rented for 4,000 per
  year payable on May 1 each year.
• Property taxes are 800, paid in January
• Liability insurance is 50, paid in January
• Joes dad purchased this farm for 10,000 and
  gave to Joe.
• Purpose for the ownership was to provide for
  Joes grandchildrens education
• Joes will established a GC education trust

11
Case Study cont. P. 564

• Joes will placed the 40 acre farm into a
  testamentary trust.
• Joes will also made a pecuniary bequest of
  10,000 into the trust.
• Ginny was named trustee
• Ginny chose to fund the pecuniary bequest with
  10,000 of ABC, Inc stock which Joe owned.
• Stock at time of funding was 100/ share

12
Case Study, cont. P. 564

• The Brown Children Education Trust distributed
  10,500 to grandchild Larry for tuition expenses
  in 2004.
• 30 shares of ABC, Inc stock was sold for 115 per
  share to help fund the 10,500.
• In the estate this same stock was valued at 120
  per share

13
Basis in ABC, Inc. Stock

• 1000 Shares
• Purchased for 125 per share 125,000
• Appraised in the estate
  at 120 per share 120,000
• 100 Shares
• 100 shares were transferred
  to the grandchildrens trust
  October 20, 2003 with value
  at that time of 100 per share
  10,000
• 30 shares of this 100 were sold
  for 115 per share in 2004
  3,450

14
Joe and Ginnys assets p. 565
15
Joe and Ginnys assets cont.
p. 565
16
Case Study cont. P. 565

• Stock pays quarterly dividends
• February, May, August, and November
• 2.50 each quarter per share
• Joe paid 9,000 per month wages of which 3,000
  was paid to his estate April 1, 2003.
• 966 income tax reported
• 1,860 social security tax
• 435 medicare tax
• No withholding of income tax on the 3,000

17
Case Study cont. P. 565

• Ginny
• 40,000 wages in 2003
• Did not work after selling IA farm
• Therefore Ginny had no wage income in 2004

18
Case Study cont. P. 566

• Balance of facts we will explore as we review tax
  returns.

19
Joint Tax Return p. 568

• Line 6d 2 dependents
• Line 7 Wages 67,000
• Joe 9,000 for 3 months
• Ginny 40,000
• doesnt include Joes paid after death
• Line 9a Dividends 9,750
• 2,500 February
• 3,750 Ginnys 1/2 May, August,
  November
• 3,500 estate share received on K-1

20
Joint Tax return cont. p. 568

• Line 13a Capital loss carryfwd (3,000)
• Line 17 farm rent 31,650
• loss MN land rent, SchE ( 850)
• Corn sale 3/1/03, 4835 19,000
• Ginnys
• 50 corn sale 6/1/03, 4835 13,500
• 50 crop exp 5/15/03, 4835(6,000)
• Estates
• 50 corn sale 6/1/03, 13,500
• 50 crop exp 5/15/03 (6,000)

21
Joint Tax return cont. p. 568

• Land rent cont.
• Minus estate adm cost (1,500)
• Line 22 Total income 105,400
• Line 37 Itemized deductions 9,500
• Line 39 Exemptions 6,100
• Line 40 Taxable income 89,800
• Line 60 Total Tax 15,102

22
Joint Tax Return cont. p. 570

• Capital Loss
• Capital Gains and Losses Schedule D
• Line 17a Capital loss carry fwd 7,000
• Line 18 Capital loss limit 3,000
• Dividends
• Line 46 and 47 9,750 x 15 1,463
• Then tax on other income is added
• Line 50 13,639
• Line 53 Total tax 15,102

23
Estate Income Tax Return, Short Year p. 575

• Line 8, Wage Income 3,000.00
• Line 20, Exemption 600.00
• Line 22, Taxable Income 2,400.00
• Line 23, Tax 410.00

24
Estate Income Tax Return Final p. 577

• Line 2, Dividends 3,500
• 50 of Dividends May and Aug.
• 80 of 50 of Nov.
• Line 5, IA Rents 7,500
• 50 corn sale June 13,500
• minus 50 crop exp (6,000)
• Total income 11,000

25
Estate Income Tax ReturnFinal p. 577

• Line 9, Total Income 11,000
• Line 14, Estate Administration
  Costs (
  1,500)
• Line 17, Adjusted Gross Inc 9,500
• Line 18, Income Distribution ( 9,500)
• Line 22, Taxable Income -0-

26
Estate Income Tax Return Final p. 578

• Capital Gain
• Line 6, 100 shares ABC stock sale
• Sale price 10,000
• Cost 12,000
• Deductible Loss -0-
• Related Party therefore loss not deductible

27
K-1 for Ginny p. 579

• Line 2a and 2b 3,500
• Line 6 6,000
• Rent 7,500
• Est Adm Costs (1,500)
• Executor can elect where to deduct except must
  prorate against nontaxable income.

28
Form 1041 2003Brown Educational Trust p. 580

• Line 2a and 2b, dividends 250
• 80 of 50 of dividends
• for Nov receipts
• Line 5, Rents 4,000
• 40 acres x 100
• Line 9, Total Income 4,250
• Line 14, Professional expenses 500
• Line 17, Adjusted income 3,750

29
Form 1041, 2003 cont. P. 580Brown Educational
Trust

• Line 17, Adjusted Income 3,750
• Line 20, Exemption 100
• Line 22, Taxable Income 3,650
• Line 23, Tax 698

30
Form 1040 2004Ginny p. 582

• Line 8a, Interest 20,000
• Line 9a, Dividends 9,000
• 9000 shares, 2.50/ quarter dividends
• Line 13a, Capital Loss (2,000)
• 4,000 loss carryfwd Joe and Ginny
• 1/2 is lost in Joes estate
• Stock was community property
• not owned with rights of survivorship
• Line 34, Adjusted Gross Income 27,000
• Line 43, Tax 2,534

31
Form 4797 2004Sales of Business Property p.
584

• Line 2 Farm sale
• Sale Price 400,000
• Basis 400,000
• Gain -0-

32
Form 1041 2004Brown Education Trust p. 585

• Line 2a and 2b, Dividends 1,000
• Line 5, Rent 3,150
• Gross 4,000
• Real Estate Tax ( 800)
• Insurance ( 50)
• Line 9, Total Income 4,150

33
Form 1041 2004Brown Education Trust P. 585

• Line 9, Total Income 4,150
• Line 14, Professional Fees 500
• Line 18, Income Distribution Ded 3,600
• Actual distribution 10,500
• Line 20, Exemption 100
• Line 22, Taxable Income ( 100)
  

34
Form 1041 Schedule D 2003Brown Education Trust
p. 586

• Line 6 Sold 30 shares of ABC
• Sale price 30 shares _at_ 115 3,450
• Cost 3,450
• Trust basis was 100 per share or 3,000,
  See Figure 12.12
• However basis is increased by disallowed
  loss on Estate Income Tax Return for related
  party. See Figure 12.12 loss of 20 per share.

35
K-1 Larry Brown 2004 p. 587

• Line 2a and 2 b, Dividends 1,000
• Line 6a, Rent 2,650
• The total distribution was 10,500 however Larry
  reports as income only the 3,650 above. The
  difference of 6,850 is a capital distribution
  and not taxable to Larry.

36
Form 1040 2004Larry Brown p. 588

• Line 9a and 9b, Dividends 1,000
• Line 17, Rent 2,650
• Larry could have other entries on his tax return
  therefore only a partial tax return is shown.

37
Other Topics

• What if an Ohio Estate, Estate tax return
• The Ohio property would total
• Total estate value 964,868
• Iowa real property (400,000)
• Minnesota real property ( 40,000)
• Life insurance ( 50,000)
• Ohio taxable property 474,868
• Ohio estate tax 10,092

38
Other Topics

• Ohio tax would not allow farm use valuation of
  the land (CAUV) since it is located out of Ohio
• If could qualify for farm use valuation the basis
  in the property is the fair market value. Basis
  is determined under federal tax law.

39
Other Topics

• Family Owned Business Deduction
• Federal tax law eliminates the Family Owned
  Business Deduction on 1/1/04.
• However, Ohio has determined it will continue the
  Family Owned Business Deduction.
• This is an issue to monitor

40
LTR 200321006 p. 660

• Farmland leased by an estate to
• two LLCs is not disposition
• of interest in closely held business
• under I.R.C. 6166(g)(1)(A) and
• wont result in acceleration of
• installment payments.

41
Estate of Armstrong v. Commissioner p. 660

• Gift taxes included in estate
• under the 3-year rule were not
• reduced by consideration
• supposedly received
• for paying them.

42
Rev. Rul. 2003-61 p. 662

• An I.R.C. 303 redemption
• of stock that is part of
• a qualified family-owned business
• interest (QFOBI) doesnt prevent
• estate from electing
• QFOBI estate tax deduction and
• doesnt trigger recapture tax.

43
Estate of Strangi v. Commissioner p. 673

• The IRS successfully uses
• I.R.C. 2036(a)(2) to include assets transferred
  to a FLP
• in the transferors estate.