Monday, January 29, 2007
Michael T. Yu (Assistant Professor of Law, California Western School of Law) has recently published his article entitled A Proposed Allocation of Distributable Net Income to the Separate Shares of a Trust or Estate, 3 Pitt. Tax. Rev. 121 (2006).
Here is his introduction:
The general purpose of the separate share rule is to prevent one separate share of a trust or estate from being required to pay the income tax attributable to income being accumulated for another separate share. Under the separate share rule, separate shares of a trust or estate are treated as separate trusts or separate estates only for the purpose of determining the amount of distributable net income (DNI) used in calculating the income taxation of the trusts or the estates, and the beneficiaries of such trusts or estates. On December 28, 1999, the Treasury Department issued final separate share regulations, addressing, among other issues, when separate shares of a trust or estate come into existence and how DNI is computed and allocated to separate shares of a trust or estate.
This article examines the allocation of DNI to the separate shares of a trust or estate provided in the separate share regulations and provides two criticisms of such allocation. The first criticism is that the allocation of DNI is based upon each separate share's "portion of gross income includible in distributable net income" as opposed to being based upon the DNI of the trust or estate. This article discusses certain items of income, most notably tax-exempt interest and certain "outside income" not considered fiduciary accounting income, that are not "gross income includible in distributable net income" within the meaning of the separate share regulations and are, therefore, never allocated to the separate shares of a trust or estate, thereby sometimes producing inequitable results. The second criticism is that the allocation of DNI, by providing a mandatory allocation of income in respect of a decedent (IRD) in a certain fixed manner, contravenes the treatment of IRD under § 691 and related regulations, which generally provide that IRD is included, in the year in which the IRD is received, in the actual recipient's gross income. Finally, this article proposes an allocation of DNI that addresses tax-exempt interest and the income items that are not fiduciary accounting income and allocates and reallocates DNI attributable to IRD based upon who actually receives the IRD.
Part I of this article provides an overview of the income taxation of trusts and estates with separate shares, and Part II provides an overview of the separate share rule and separate share regulations. Part III criticizes the separate share regulations for excluding tax-exempt interest and non-IRD outside income from the allocation of DNI of the separate shares of a trust or estate. Part IV criticizes the separate share regulations for providing a mandatory pro rata allocation of DNI attributable to IRD to the separate shares that could potentially be funded with such IRD. Finally, Part V presents a proposed allocation of DNI to the separate shares of a trust or estate.