670 MODULE 37 TAXES: GIFT AND ESTATE
well as the maximum amount of distributions deduction for
an estate.
31. (c) The requirement is to determine the amount of
the estate's $15,000 distribution that is taxable to the sole
beneficiary. The maximum amount that is taxable to the
beneficiary is limited to the estate's distributable net income
(DNI). An estate's DNI is generally its taxable income be-
fore the income distribution deduction, increased by its ex-
emption, a net capital loss deduction, and tax-exempt inter-
est (reduced by related nondeductible expenses), and
decreased by any net capital gains allocable to corpus. Here,
the estate's DNI is its taxable interest of $40,000, reduced by
the $34,000 of expenses attributable to taxable interest, or
$6,000.. . charitable organization. The amount allowed as a charitable
32. (b) The requirement is to determine the correct
statement regarding an estate's estimated income taxes.
Trusts and estates must make quarterly estimated tax pay-
ments, except that an estate is exempt from making esti-
mated tax payments for taxable years ending within two
years of the decedent's death.
33. (c) The requirement is to determine the correct'
statement regarding a complex trust. A simple trust is one
that (1) is required to distribute all of its income to desig-
nated beneficiaries every year, (2) has no beneficiaries that
are qualifying chdritable organizations, and (3) makes no
distributions of trust corpus (i.e., principal) during the year.
A complex trust is any trust that is not a simple trust. An-
swer (a) is incorrect because a complex trust is not required
to distribute income currently, nor is it prohibited from dis-
tributing trust principal. Answer (b) is incorrect because
there are no investment restrictions imposed on a complex
trust. Answer (d) is incorrect because an income tax is im-
posed on a trust's taxable income.
34. (a) The requirement is to determine the amount of
standard deduction for a trust or an estate in the fiduciary
income tax return (Form 1041). No standard deduction is
available for a trust or an estate on the fiduciary income tax
return. On the other hand, a personal exemption is allowed
for an estate or trust on the fiduciary income tax return. The
personal exemption is $600 for an estate, $300 for a simple
trust (i.e., a trust required to distribute all income currently),
and $100 for a complex trust (i.e., a trust other than a simple
trust).
35. (d) The requirement is to indicate whether estate
and trusts are required to use the calendar year as their tax-
able year. All trusts (except those that are tax exempt) are
generally required to use the calendar year for tax purposes.
In contrast, an estate may adopt the calendar year, or any
fiscal year as its taxable year.
36. (c) The requirement is to determine the proper treat-
ment for ordinary and necessary administrative expenses
paid by the fiduciary of an estate. Ordinary and necessary
administrative expenses paid by the fiduciary of an estate
can be deducted on either the estate's fiduciary income tax
return, or on the estate's federal estate tax return. Although
the expenses cannot be deducted twice, they can be allocated
between the two returns in any manner that the fiduciary
sees fit. If the administrative expenses are to be deducted on
the fiduciary income tax return, the potential estate tax de-
duction must be waived for these expenses.
37. (c) The requirement is to determine when a fiduci-
ary income tax return for a decedent's estate must be filed.
The executor of a decedent's estate that has only US citizens
as beneficiaries is required to file a fiduciary income tax
return (Form 1041) if the estate's gross income is $600 or
more. The return is due on or before the 15th day of the
fourth month following the close of the estate's taxable year.
38. (c) The requirement is to determine the correct
statement regarding the charitable contribution deduction on
an estate's fiduciary inc,ome tax return (Form 1041). An
estate is allowed a deduction for a contribution toa charita-
ble organization if (1) the decedent's will specifically pro-
vides for the contribution, and (2) the recipient is a qualified
deduction is not subject to any percentage limitations, but
must be paid from amounts included in the estate's gross
income for the year of contribution.
39. (c) The requirement is to determine who will be
taxed on the trust's 2009 income. During 2009, Carlt cre-
ated a trust providing a lifetime income interest for his
mother, with a remainder interest to go to his son, but he
expressly retained the power to revoke both the income in-
terest" and remainder interest at any time. when the grantor
of a trust retains substantial control over the trust, such as
the power to revoke the income and remainder interests, the
trust income will be taxed to the grantor and not t-o the trust
or beneficiaries.
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40. (b) The requirement is to determine the estate's
distributable net income (DNI). An estate's DNI generally
is its taxable income before the income distribution deduc-
tion, increased by its personal exemption, any net capital
loss deduction, and tax-exempt income (reduced by related
expenses), and decreased by any net capital gain allocable to
corpus. Here, the estate's DNI is the $65,000 of taxable
interest, reduced by the $14,000 of administrative expenses
attributable to taxable income and the $9,000 of charitable
contributions. Charitable contributions are allowed as a
deduction if made under the terms of the decedent's will and
are paid to qualified charitable organizations from amounts
included in the estate's gross income.
41. (a) The requirement is to determine the correct
statement for income tax purposes regarding the initial tax-
able period for the estate of a decedent who died on Octo-
ber 24. For income tax purposes, a decedent's estate is al-
lowed to adopt a calendar year or any fiscal year beginning
on the date of the decedent's death. Answer (b) is incorrect
because an estate may adopt a calendar year and is not re-
stricted to a fiscal year. Answer (c) is incorrect because the
estate's first tax year would begin on October 24, not Octo-
ber 1. Answer (d) is incorrect because an estate is not re-
stricted to a calendar year, and if it adopted a calendar year,
its initial year would begin with the date of the decedent's
death (October 24).
IV. Tax Return Preparers
42. (b) The requirement is to determine which acts con-
stitute(s) grounds for a tax preparer penalty. A return pre-
parer will be subject to penalty if the preparer knowingly or
recklessly discloses information furnished in connection
with the preparation of h tax return, unless such information
is furnished for quality or peer review, under an administra-
tive order by a regulatory agency, or pursuant to an order of