the United States, the Secretary of the Treasury being directly charged with its enforcement. The work of administration is in the hands of a branch of that department, the Bureau of Internal Revenue. Communications to Washington in reference to income tax matters should be addressed to the head of that Bureau, the Commissioner of Internal Revenue. The law, subject to the constitutionality of all its provisions, is the final source of authority as to what the Bureau has a right to do. But the law, long as it is, does not begin to cover the many points arising in a matter which affects every recipient of income in the country. The Commissioner has issued various regulations setting forth his interpretation of the law, and it is in accordance with these regulations that forms are provided and taxes assessed. A taxpayer who does not believe that the Commissioner's interpretation is correct has the right to appeal to the courts, and on some very important matters the Bureau has been overruled. § 214. Law as to Fiduciaries There are a few points in the income tax law which apply peculiarly to fiduciaries. These points will be considered in the following discussion, in which it has been assumed that the reader is acquainted with general income tax procedure. The law defines a fiduciary as "a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate."5 The regulations amplify this definition by saying: "Fiduciary" is a term which applies to all persons that occupy positions of peculiar confidence toward others, such as trustees, executors and administrators, and a fiduciary for income tax purposes is a person who holds in trust an estate to which another has the beneficial title or in which another has a beneficial interest, or receives and controls income of * Revenue Law of 1918, § 200. another as in the case of receivers. A committee of the property of an incompetent person is a fiduciary. In this sense an agent is not a fiduciary if no legal trust has been created in the estate controlled by the agent. § 215. Returns for Estate The returns required and the rules as to payment of income taxes due at the time of death have been set forth in Chapter XXVI. (See § 208.) The principles covering the returns for incomes of estates have been outlined in §§ 209 and 210. The return for the income earned by the deceased is to be made on whatever form he would have used if he had been alive. The income earned by the estate is to be reported on Form 1041 if the tax is payable by the beneficiaries (see § 220), and on Form 1040 (revised), except that it may be on short Form 1040A (revised) where the net income does not exceed $5,000.1 Every fiduciary is responsible for making the return of income at annual intervals until the close of the estate or trust for which he acts. In the case of administrators this duty continues during the period required to perform the ordinary duties pertaining to administration-in particular, the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether Article 1521 of Regulations 45. § 216. Return Where There Are Two Trusts In the case of two or more trusts the income of which is taxable to the beneficiaries, which were created by the same person and are in charge of the same trustee, the trustee shall make a single return on form 1041 (revised) for all such trusts, notwithstanding that they may arise from different instruments. When, however, a trustee holds trusts created by different persons for the benefit of the same beneficiary, he shall make a return on form 1041 (revised) for each trust separately." § 217. Returns Must Indicate Each Beneficiary's Share In the case of certain fiduciaries the tax is assessed directly against the fiduciary, and the income when distributed by him comes to the recipients no longer subject to income tax, since all the obligations of the law have once been met. (See § 219) In other cases the tax is not collected from the fiduciary, and the recipients of the income must include it in their personal returns and pay the tax (see § 220), but the fiduciary in every case is required to make a return of income, and to "include in the return a statement of each beneficiary's distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made."10 § 218. Personal Liability of Fiduciary A fiduciary should not make a final distribution until all past returns have been audited, including those covering the decedent's life, for any additional tax arising from such returns is a charge against the estate. Liability for payment of the tax attaches to the person of an executor or administrator up to and after his discharge, where prior to distribution and discharge he had notice of his tax obligations or failed to exercise due diligence in determining whether or not such obligations existed. Article 423 of Regulations 45. 10 Revenue Act of 1918, § 219 (b). Liability for the tax also follows the estate itself, and when REVIEW QUESTIONS 1. What is the duty of an executor or administrator in regard to income returns and taxes on an estate being settled? When would a representative make returns and pay taxes? 2. What are the duties of a trustee as to income taxes and returns? What is the rule as to the estate of a non-resident alien? What is a trustee required to do in case of payments of $1,000 or more? 3. Why are returns of income rarely correct? 4. Why are the services of an expert desirable? 5. Who administers the federal income tax law? What is the relation of the Regulations to the law? What is a fiduciary? Distinguish between a fiduciary and an agent. 6. What is a personal representative required to do as to making returns? What are the duties of fiduciaries generally as to the income returns? 7. When a trustee has two or more trusts created by the same person, what return is to be made? 8. Who primarily pays the tax, the trustee or the beneficiary? Does this affect the trustee's duty as to reporting the income distributed? 9. When is the final return made? When is the tax paid? 10. What liability has a fiduciary as to payment of income taxes? How may he secure himself? 11 Article 344 of Regulations 45. CHAPTER XXVIII FEDERAL INCOME TAX-RULES FOR FIDUCIARIES § 219. When Tax Runs Against Fiduciary The tax is imposed on the net income of the estate or trust and must be paid by the fiduciary on: I. Income received by estates of deceased persons during the period of administration or settlement of the estate. 2. Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests. 3. Income held for future distribution under the terms of the will or trust. From the income of a decedent's estate there may first be deducted any amount of income properly paid or credited to a beneficiary. . . . Where under the terms of the will or deed the trustee may in his discretion distribute the income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion. The imposition of the tax is not affected by the fact that an ultimate beneficiary may be a person exempt from tax.' § 220. When Tax Runs Against Beneficiaries In the case of (a) a trust the income of which is distributed periodically, (b) an ordinary guardianship of a minor, and (c) an estate of a decedent before final settlement as to any income properly paid or credited as such to a beneficiary, the income is taxable directly to the beneficiary or beneficiaries. Each beneficiary must include in his return his distributive share of the net income, even though 1 Article 342 of Regulations 45. |