Category: Estates & Trusts: Income Tax; Deductions
& Credits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background The estate received an item of income in respect of a decedent (IRD) in the amount of approximately $40,000. The estate tax attributable to that item of IRD is approximately $20,000. Sufficient distributions were made by the estate to its beneficiaries between the date of death and February 28, 1995 such that all estate income will be passed through to the beneficiaries. Notice that as of the anticipated fiscal year end of the estate, the estate tax had not yet been paid. Issues 2. Is the deduction for estate tax attributable to IRD passed through to the beneficiaries of the estate? 3. How does the estate tax deduction attributable to IRD interact with the credit for state death taxes? Answers 2. Estate tax attributable to IRD is passed through to the estate beneficiaries if the IRD item is paid, credited, or required to be distributed by the estate in the tax year in which it is received. 3. The credit for state death taxes is taken into account in both the "with" and the "without" calculation for purposes of computing the deduction for estate tax attributable to IRD. Discussion: Issue One
This is the only place I can locate such language, and it is my opinion that the instruction is simply an example of loose terminology. The deduction for estate tax attributable to IRD is provided for at Section 691(c). The following three passages are relevant.
Notice that the language of the statute is couched in terms of estate tax attributable, estate tax imposed, and estate tax computed. It seems to me that if Congress had meant paid, they were perfectly capable of saying so and this would have been an obvious place to express that intent. The regulations at Section 1.691(c) contain virtually identical language. Moreover, it seems to me that the statute provides express and unequivocal instructions as to timing as the very first matter discussed under Section 691(c). 691(c)(1)(A) GENERAL RULE.--A person who includes an amount in gross income under subsection (a) shall be allowed, FOR THE SAME TAXABLE YEAR, as a deduction an amount which bears the same ratio to the estate tax attributable to the net value for estate tax purposes of all the items described in subsection (a)(1) as the value for estate tax purposes of the items of gross income or portions thereof in respect of which such person included the amount in gross income (or the amount included in gross income, whichever is lower) bears to the value for estate tax purposes of all the items described in subsection (a)(1). [Emphasis added.] It seems to me that as tax statutes go, this one is extremely clear as to its intent. The statute plainly says the deduction is allowed in the same year as the IRD item is reported as income by the recipient. Again, if Congress has intended to delay the deduction until actual payment of the related estate tax, they could have said so and this would actually have been the most logical place for such a restriction to be inserted. Discussion: Issue Two
In other words, if the estate pays, credits, or is required to distribute the IRD item in the year in which it is received by the estate, the beneficiary picks up the item into income and takes the deduction for the estate tax attributable to that IRD item. Once the IRD item is excluded from the gross income of the estate, the general rule of Section 691(c)(1)(A) comes into play again to tax the ultimate recipient of the IRD item, the estate beneficiary, on receipt of the item and to further allow the beneficiary the right to deduct the estate tax attributable to that IRD item. An individual beneficiary's deduction for the estate tax attributable to IRD is an itemized deduction not subject to the 2% floor. Rev. Rul. 78-203, 1978-1 CB 199, and IRC Section 67(b)(8). Also, the deduction is not considered a miscellaneous itemized deduction for purposes of the alternative minimum tax. IRC Section 56(b)(1). Discussion: Issue Three Set forth below is an interesting observation excerpted from BNA, Tax Management Portfolio 32-3rd Comment: Reducing the federal estate tax by the credit for state death taxes paid results in a portion of the IRD being subject to both federal income and estate taxes. This result does not occur if the decedent recognizes the income. Example: In the year of his death, John recognizes an additional $1,000 of income which results in federal income tax liability of $280 ($1,000 X 28%). The balance of $720 of income incurs state death taxes of $72 ($720 X 10%) and federal estate taxes of $360 ($720 X 50%), but the federal estate tax is reduced by the state death tax. After all income and estate taxes are paid, John's heirs receive $360 from the original $1,000 of income. Assume John does not recognize the income, but that his estate has the
right to receive the income as an item of IRD. The IRD results in state
death taxes of $100 ($1,000 X 10%) and federal estate taxes of $500 ($1,000
X 50%), but again, the federal estate tax is reduced by the state death
taxes paid. Upon receipt of the $1,000 IRD, the recipient pays income tax
on $600 ($1,000 - ($500 - $100)) or pays $168 ($600 X 28%). After all taxes
are paid, John's heirs net only $332. This $28 difference from the result
when John recognizes the income is equal to the state death tax credit
($100) multiplied by the federal income tax rate (28%). |
