Accounting Income and the IRS

• Author: Seymour Goldberg
• Profession: Senior partner in the law firm of Goldberg & Goldberg, PC in Woodbury, New York
• Pages: 97-98

According to the Internal Revenue Service (IRS), generally “income,”

when not preceded by the words “taxable,” “distributable net,” “undistrib-

uted net,” or “gross,” means the amount of income of an estate or trust

for the taxable year determined under the terms of its governing instru-

ment and applicable local law.

According to IRS nal regulation 1.643(b)-1 issued on December 30,

2003, the IRS will generally respect amounts allocated between income

and principal pursuant to applicable local law for income tax reporting

purposes. According to the IRS, the allocation will be respected if local

law provides for a reasonable apportionment between the income and

remainder beneciaries of the total return of the trust for the year.

In addition, the IRS indicated that a state law that provides for the

income beneciary to receive each year a unitrust amount of between 3

percent and 5 percent of the annual fair market value of the trust assets

is a reasonable apportionment of the total return of the trust.

However, this 3 percent to 5 percent rule is not applicable to a chari-

table remainder unitrust. The IRS further indicated in its nal regulations

that it will recognize the following:

(1)

A state law regarding the determination of income and principal that

satises the reasonable apportionment rules previously mentioned.

(2)

A state law that permits the trust to make adjustments between

income and principal in order to fulll the trustee’s duty of impar-

tiality between the income and remainder beneciaries.

(3)

In addition, an allocation of capital gains to income will be respected

if directed by the terms of the governing instrument and applicable

97

ACCOUNTING INCOME

AND THE IRS

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