Question

:The Fish Trust is a simple trust. Mrs. Jones is its sole beneficiary. In the current year, the trust earns $15,000 in taxable interest and $2,000 in tax-exempt interest. In addition, the trust recognizes an $7,000 long-term capital gain. The trustee assesses a fee of $4,000 for the year. If the trust agreement allocates fiduciary fees to income, but allocates capital gains to corpus, what is the trust’s accounting income for the year?

a $21,000 b $13,000 c $15,000 d $17,000

The Walling Trust is a simple trust that correctly uses the calendar year for tax purposes. Its income beneficiaries (Cassidie and Sarah) are entitled to the trust’s annual accounting income in shares of one-half each. Ordinary Income $100,000 Long-term Capital Gains, allocable to income 30,000 Trustee Commission expense, allocable to corpus 5,000 What is the trust’s DNI?

a 95,000 b 124,700 c 125,000 d 29,700

1. How do you calculate an entity’s taxable income?

2. Grantor trust will be taxed if it retains control over which of the following?

   1. Control of beneficiaries income

   2. Control of Corpus

   3. Power to dispose of trust income without approval of any adverse group

Answer 1

Ques. The Fish Trust is a simple trust. Mrs. Jones is its sole beneficiary. In the current year, the trust earns $15,000 in taxable interest and $2,000 in tax-exempt interest. In addition, the trust recognizes an $7,000 long-term capital gain. The trustee assesses a fee of $4,000 for the year. If the trust agreement allocates fiduciary fees to income, but allocates capital gains to corpus, what is the trust’s accounting income for the year?

Ans. Accounting income of trust = taxable interest + tax-exempt interest - trustee fees for the year

= $15,000 + $2,000 - $4,000

= $ 13,000

Option b is correct ($ 13000).

Note : Capital gains are assessed separately under head capital gains, they are not part of normal accounting income. Same way tax exemption of interest has no implication in determining accounting income as tax exemption has relevance only for tax computation purposes. Trustee fees are deducted while computing accounting profits.

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