1
Q
Who is eligible to own shares in an S-Corporation?
A
An S-Corporation’s ownership is restricted to:
- Estates
- Trusts
- Individuals
C-Corporations are ineligible.
2
Q
What is the main tax benefit of choosing an S-Corporation structure?
A
The primary advantage is the avoidance of double taxation.
3
Q
What are some limitations associated with S-Corporations?
A
- Maximum of 100 shareholders
- Only one class of stock
- Shareholders must be U.S. citizens or residents
4
Q
How is the basis for a shareholder in a corporation calculated when acquiring new interest?
A
The calculation is: Adjusted basis of contributed property + Recognized gain (if ownership is below 80%) - Boot received = Shareholder basis.
- No taxable event if shareholders have 80% control after property transfer.
- Gain is recognized if liabilities exceed basis on contributed property.
5
Q
What formula is used to determine a transferor’s basis when transferring interest in a corporation?
A
Transferor’s basis plus any gain recognized by the shareholder equals the basis.
Alternatively:
FMV of Corporate Interest - Adjusted basis of property = Gain
6
Q
What basis do both shareholders and corporations use for property?
A
They utilize the adjusted basis, not the fair market value (FMV) of the property.
7
Q
How is a loss on worthless Section 1244 small business stock classified?
A
A loss on such stock is categorized as an ordinary loss.
8
Q
What criteria must be met to claim an ordinary loss under Section 1244?
A
- Taxpayer must be the original stock owner, either an individual or partnership.
- Loss limit is $50k (single) or $100k (MFJ); excess is a capital loss.
- Stock must be issued in exchange for money or property, not services.
- Shareholder equity must not exceed $1 million.
- Both common and preferred stock qualify.
9
Q
What are the key filing rules for a Form 1120?
A
- Filing is mandatory regardless of income.
- Due date is 4/15 for calendar year, or 3 1/2 months post-fiscal year-end.
- Automatic six-month extension is available.
- S Corp returns are due 3/15 compared to 4/15 for C Corps.
10
Q
Under what conditions are corporate federal tax estimated payments necessary, and how are they computed?
A
Payments are required if:
- Expected tax liability exceeds $500.
- Based on either 100% of current year or previous year liability.
Note: If prior year’s revenue exceeded $1 Million, the first estimated payment uses the previous year, with the remainder based on the current year.
11
Q
When is a C-Corporation exempt from the Alternative Minimum Tax (AMT)?
A
C-Corporations are always exempt as the corporate AMT was repealed under the TCJA.
12
Q
How are gains and losses from a corporation’s own stock transactions treated?
A
Corporations do not recognize gain or loss from transactions involving their own stock, including treasury stock.
No gain or loss is recognized if property is exchanged for stock.
13
Q
How should a corporation handle its organizational costs?
A
Amortization of these costs begins in the month business activities commence.
If costs are not amortized in the first year, they cannot be amortized later.
Costs related to offerings are neither deductible nor amortizable.
14
Q
How do you calculate a C-Corporation’s deductible charitable contributions?
A
Start with: Sales - COGS = Gross Profit
Add: Rent, Royalties, Gross Dividends, Capital Gains
= Total Income
Subtract: Deductions (excluding charitable contributions, Dividends Received Deductions (DRD)) and NOL Carryforwards
= Taxable Income before charitable contributions & DRD
Multiply by 10%
= Deductible Charitable Contributions
15
Q
What happens to excess charitable contributions in a C-Corporation?
A
They are carried forward for up to 5 consecutive years (no carryback).
16
Q
By what date can a board of directors authorize charitable contributions for the previous tax year?
A
Charitable contributions can be authorized by the Board of Directors up to March 15th to count for the prior tax year.
17
Q
What are the ownership thresholds for the Dividends Received Deduction (DRD)?
A
- 80%+ Interest = 100% DRD
- 20-79% interest = 65% DRD
- Less than 20% interest = 50% DRD
Note: Only applicable if no consolidated return is filed and for qualified dividends from domestic corporations.
18
Q
How is the DRD calculated when there is an operational loss?
A
Apply the DRD percentage to Taxable Income.
Note: If the DRD results in a loss, the full DRD can be taken. If Taxable Income remains, only a partial DRD (Taxable Income x DRD %) is allowed.
19
Q
How are losses handled in a C-Corporation for sales to a corporation where the taxpayer owns at least 50%?
A
Loss from such a sale is disallowed.
20
Q
How are capital losses treated in a C-Corporation?
A
Capital losses are only deductible against capital gains.
21
Q
How are short-term capital gains taxed in a C-Corporation?
A
Short-term capital gains for a C-Corporation are taxed at ordinary income tax rates.
22
Q
Explain how Corporate Net Operating Losses (NOLs) are carried over.
A
Under the Tax Cuts and Jobs Act (TCJA), corporations are generally not allowed to carry back NOLs. They can carry them forward indefinitely, subject to an 80% limitation on taxable income.
23
Q
How should a corporation account for bad debt losses?
A
Bad debt losses in a corporation are treated as ordinary losses.
24
Q
What is the casualty loss limitation for a C-Corporation?
A
C-Corporations do not have a casualty loss floor like individuals. If property is destroyed, the loss equals the adjusted basis minus insurance proceeds. For partial destruction, the loss is the lesser of the reduction in FMV or adjusted basis minus proceeds.
Calculation: Adjusted basis - Insurance proceeds = Loss
25
What is the function of Schedule M-1 on a corporate tax return?
Schedule M-1 reconciles book income with tax income before NOL and DRD, including permanent differences like tax-exempt interest and temporary differences like accelerated depreciation.
## Footnote
Important for understanding book-tax differences.
26
How does Schedule M-2 function on a corporate tax return?
Schedule M-2 reconciles the beginning and ending retained earnings: Start with beginning unappropriated retained earnings, add net income and other increases, and subtract dividends and other decreases.
27
What is the role of Schedule M-3 in corporate tax filings?
Schedule M-3 is used for corporations with $10 million or more in assets, providing a detailed reconciliation of book and tax income, similar to M-1 but more comprehensive.
28
How are tax returns for affiliated corporations (80% ownership) managed?
Affiliated corporations can elect to file consolidated returns, binding for future years. Dividends between affiliates are eliminated, deferring gains but also losses. Only one accumulated earnings tax is allowed.
## Footnote
Consolidation requires 80% voting power and stock value ownership.
29
Describe the treatment of corporate distributions to shareholders.
1. Distributions are dividends up to the amount of current and accumulated earnings (ordinary income).
2. Any excess is a return of basis.
3. Remaining amounts are treated as capital gains.
## Footnote
Distribution amount = FMV of Property + Cash - Liability Assumed
30
Outline the sequence for handling corporate distributions to shareholders.
1. Distributions are dividends to the extent of current and accumulated earnings.
2. Shareholder's basis is reduced.
3. Any remaining amount is considered a capital gain.
31
How do you calculate the ending accumulated earnings and profits in a corporation?
Starting with Beginning Accumulated Earnings and Profits, add Net Income and any Gain on Distribution not included in book income, then subtract Distributions that don't create a deficit and any prior year NOLs to find the Ending Accumulated Earnings and Profits.
## Footnote
Essential for corporate tax compliance.
32
How is gain treated in a full corporate liquidation?
In a complete corporate liquidation, gains are considered capital gains if the property is capital in nature and as ordinary income if it's non-capital. This classification applies to both the corporation and the shareholder.
33
What is the tax treatment of a loss during a full corporate liquidation?
For a corporation, losses depend on whether the property is capital or non-capital, resulting in either a capital loss or ordinary loss. For individuals, only capital losses are recognized.
34
What happens tax-wise when a subsidiary is liquidated?
There is no gain or loss recognized by the parent company upon the liquidation of a subsidiary.
35
Define a consent dividend and its tax implications.
A consent dividend is declared by the Board of Directors but not paid out yet and is treated as distributed by the end of the tax year.
36
List the criteria for a company to be a personal holding company (PHC).
- Not a bank or financial institution
- More than 50% of stock owned by five or fewer individuals
- 60% of income from passive sources
- Subject to self-assessed PHC tax at 20% on undistributed income
37
Compare corporate accumulated earnings tax (AET) with PHC tax.
Unlike PHC tax, which is self-assessed, the corporate accumulated earnings tax (AET) is not self-assessing.
38
How is the accumulated earnings credit for a corporation determined?
The credit is the greater of $250,000 ($150,000 for service corporations) or the reasonable needs of the business, such as future capital expenditures.
39
What are the qualifications for a corporation to elect S-Corporation status?
To qualify as an S-Corporation, only individuals, estates, and certain trusts can be shareholders, it must be domestic, with no more than 100 shareholders, only one class of stock, and it must follow a calendar tax year.
40
How is the election for S-Corporation status made?
The election must be filed by March 15th for it to be effective from the beginning of the year. All shareholders must unanimously consent for the election to be valid.
41
What is required to terminate an S-Corporation election?
Consent from **50%** of shareholders is necessary to terminate.
- No election for 5 years post-termination.
- Termination is immediate after a disqualifying event.
42
Which items are excluded from an S-Corporation's ordinary income calculation?
Items not part of ordinary income but on Schedule K include:
- Deduction for foreign taxes paid
- Investment interest expense
- Section 179 deduction
- 1231 gain or loss
- Charitable contributions
- Portfolio income (*like dividends or interest*)
43
How do you compute the basis for an S-Corporation shareholder?
Start Basis
**+** Income items share (*includes tax-exempt income*)
**-** Distributions (*cash/property*)
**-** Non-deductible costs
**-** Ordinary losses (*basis can't go below zero*)
**=** Ending basis
44
What is the formula for calculating an S-Corporation's Built-in Gains Tax?
Fair Market Value of Assets at election
**-** Adjusted basis of assets
**=** Built-in gain
**x** 21% corporate tax rate
45
How does gift taxation differ from estate taxation?
Gift taxation applies when property is transferred while the donor is alive.
46
What is the annual exclusion for gift taxation, and what conditions must be met?
The annual exclusion is **$19,000** per individual, per spouse.
- Married couples can jointly gift $38,000 tax-free.
- Recipient must have immediate, unrestricted access to the gift.
47
How is the value of an annuity gift determined?
**Present Value** is used to calculate the gross value of an annuity gift.
48
What is the basic calculation for gift tax?
Gross Gifts
**-** Half of gifts considered given by spouse
**-** (Number of donees x $19,000 exclusion)
**=** Taxable gifts
49
How is a gift taxed if the recipient receives future ownership?
For future ownership, the present value of the gift is fully taxable to the donor and not eligible for the annual exclusion.
50
What deductions are available for gift tax besides the annual exclusion?
- Tuition and medical payments made directly
- Political contributions
- Charitable gifts
- Unlimited gifts to a spouse
51
How is the basis of gifted property determined for the recipient?
For a **loss**, basis is FMV at gift date.
For a **gain**, basis is the donor's basis.
No gain/loss if donor basis < sale price < FMV.
52
When are gift tax returns due?
Gift tax returns follow a calendar year and are due by April 15.
53
List the main features of a complex trust.
- Optional income distributions
- Income accumulation allowed
- Charitable contributions allowed
- Tax-exempt income contributions not deductible
- $100 personal exemption
## Footnote
*Note: Distribution of trust corpus is permitted.*
54
What are the characteristics of a simple trust?
- Mandatory income distributions
- No income accumulation
- No charitable contributions
- No distribution of trust corpus
- $300 personal exemption allowed
55
How are Net Operating Losses (NOL) managed in a trust?
Trusts can incur NOLs, and any unused NOL is passed through to the beneficiaries.
56
How are expenses related to tax-exempt income treated in a trust?
Expenses from tax-exempt income are **not deductible** in either complex or simple trusts.
57
When is property transferred in an estate?
Property is transferred after the death of the owner.
58
What portion of an estate is exempt from estate tax?
$13,990,000 is exempt from estate tax.
59
How are a decedent's medical expenses handled with respect to an estate?
Medical expenses incurred within one year of death but paid after death are reported on the decedent's personal tax return.
60
How does an estate handle Net Operating Losses (NOL)?
Estates can have NOLs, with any unused portion flowing through to beneficiaries.
61
What elements are included in a Gross Estate?
A Gross Estate includes **cash** and the **fair market value of property** at the time of death or an alternate valuation date.
62
How is joint tenancy calculated in an estate context?
For joint tenancy between non-spouses, calculate by multiplying the **fair market value at death** by the **percentage of ownership** to determine the estate amount.
63
Explain tenancy by entirety in estate planning.
Half of the marital property is transferred to the deceased spouse's estate upon death.
64
Describe tenancy in common regarding an estate.
When owning property as tenants in common, if one owner (e.g., A) dies, the fair market value of their share passes to their heirs.
65
How is estate tax managed in relation to a beneficiary?
Estate tax handling for beneficiaries includes:
- Inherited property is not treated as income.
- Value is based on FMV at death or six months later.
- If sold before six months and alternate valuation is chosen, the sale FMV is used.
- Property basis assumes a long-term holding period.
66
Define distributable net income (DNI) for a trust or estate.
DNI is calculated as taxable income minus expenses related to income production. Trust beneficiaries are taxed only if earnings are distributed, while estate beneficiaries are taxed on DNI regardless of distribution.
67
# True or False:
Are partnerships recognized as taxable entities?
FALSE
## Footnote
Income and expenses flow through to partners and are reported on their individual tax returns using Form K-1.
68
What is the tax outcome when exchanging property for a partnership interest?
Exchanging property for a partnership interest is a **non-taxable event**, with neither gain nor loss recognized.
69
How is a partner's basis in partnership property determined?
The initial basis in partnership property is the same as the basis of the property contributed or exchanged for the partnership interest.
70
When services are rendered in exchange for a partnership interest, how is this treated for tax purposes?
This is a **taxable event**, treated like compensation for services. Taxable income equals the percentage of partnership interest received times the FMV of the partnership.
71
What is the partner's basis when they provide services for a partnership interest?
The basis in the partnership interest equals the taxable service revenue provided by the service provider.
72
What is the holding period for an asset contributed to a partnership?
The partnership **inherits** the holding period of the contributed asset, except for inventory, where the holding period starts upon contribution.
73
Describe the tax treatment of startup costs for a partnership.
Startup costs are treated similarly to an individual taxpayer, but syndication fees are neither deductible nor amortizable.
74
Which deductions are taken from gross revenues to determine partnership income?
- Cost of Goods Sold (COGS)
- Wages, excluding partners
- Guaranteed payments to partners
- Business bad debt (accrual basis)
- Interest paid
- Depreciation (excluding Section 179)
- Amortization (startup costs, goodwill, etc.)
75
How are partnership losses reflected on a partner's individual tax return?
Losses are limited to the partner's basis in the partnership. Losses exceeding the basis are carried forward until additional basis is available.
76
When do guaranteed payments become taxable income for a partner?
Guaranteed payments are included in a partner's taxable income during the fiscal year in which the partnership's year ends.
77
How are partner benefits paid by the partnership considered for tax purposes?
Benefits like health and life insurance paid for a partner are treated as **guaranteed payments** and are considered self-employment income.
78
How is net self-employment income from a partnership interest calculated?
Net self-employment income is calculated as follows:
- Partner's share of ordinary income from K-1
**+** Guaranteed payments
**-** Partner's share of Section 179 expense from K-1
= Self-employment income (subject to SE tax)
79
What generally determines a partner's basis in purchased partnership property?
A partner's basis in purchased partnership property is the purchase price minus any liabilities incurred. For gifted interests, gift basis rules apply.
80
Identify items not deductible on Schedule K of Form 1065.
- Foreign tax paid
- Investment interest expense
- Section 179 expense
- Charitable contributions
## Footnote
Mnemonic: **IFC179** helps remember non-deductible items.
81
Identify items that are excluded as income on Schedule K of form 1065.
- Passive Income
- Portfolio Income
- 1231 Gain or Loss
## Footnote
Relevant for partnership taxation.
Mnemonic: **PP1231**
82
What components are used to calculate the adjusted partnership basis?
Initial partnership basis
**+** Additional capital contributions
**+** Share of regular partnership income
**+** Capital gains
**+** Tax-exempt income
**=** Final partnership basis
83
Which elements decrease a partnership basis?
Partnership basis reduction occurs due to:
- Cash distributed
- Adjusted basis of distributed property
- Partner's portion of ordinary losses
- Relief from partnership liabilities
84
What actions lead to an increase in partnership basis?
Partnership basis increases with:
- Partnership obtaining a loan
- Additional capital contributions
- Ordinary income
- Capital gains
- Tax-exempt income
85
How do liabilities impact a partner's basis when incurred or relieved?
If a partnership acquires a liability, partner's basis **increases**.
If relieved of a liability, partner's basis **decreases**.
86
How do guaranteed payments influence partnership basis directly?
They do **not** directly impact the basis as they are included within ordinary income that affects basis.
87
What is the sequence for adjusting basis in a partnership?
1. Increase basis (*including tax-exempt income*)
2. Apply distributions
3. Account for losses (*limited to basis*)
88
How is a partnership's taxable year established?
It aligns with 50% of the partners and must use the same tax year for three consecutive years once set.
89
How does a partner's death affect the partnership's taxable year?
The taxable year closes only concerning the deceased partner and their partnership interest.
90
What is the revenue limit for a partnership using cash basis accounting?
Cash basis accounting is permitted if revenues are under $25 million (3-Year Average).
91
Under what conditions does a partnership terminate?
A partnership ends when:
- Fewer than 2 partners remain
- Operations cease
92
Describe the calculation for gain or loss on selling a partnership interest.
Amount realized from sale
**-** _Basis in partnership interest_
**=** Gain or Loss
93
What constitutes the new basis of a sold partnership interest?
Basis = Capital account + Assumed liabilities
94
How is the sale of non-capital partnership property handled?
Treated as **ordinary gain/loss**. Examples include unrealized receivables and appreciated inventory.
95
Explain how a partner's share of ordinary gain is computed.
FMV of Non-Capital Assets
**-** Adjusted basis of assets
**=** Ordinary gain
**x** Partner's percentage interest
**=** Partner's share of gain
## Footnote
No gain or loss recognized by partnership upon property distribution.
96
What is the sequence of basis reductions for partnership distributions?
1. Cash distributions
2. Adjusted basis of unrealized receivables and inventory
3. Adjusted basis of other property
## Footnote
Cash distributions may trigger a gain.
97
When does a loss occur in partnership distributions?
A loss may arise in a liquidating distribution.
98
What are the gain recognition requirements in a partnership liquidating distribution?
1. Cash distributed
2. Unrealized receivables distributed
3. Appreciated inventories distributed
99
When is the due date for a Partnership Return with a calendar year-end?
**March 15** with an option for a six-month extension
100
What is a consolidated tax return?
A tax return filed by an affiliated group of corporations that combines their tax liabilities.
## Footnote
Consolidated returns allow affiliated groups to file as a single entity, potentially offsetting profits from one subsidiary with losses from another.
101
# True or False:
Only corporations that are 100% owned can file a consolidated return.
FALSE
## Footnote
Corporations must be at least 80% owned within an affiliated group to file a consolidated return.
102
What must occur to eliminate intercompany transactions in a consolidated return?
Intercompany sales, dividends, and other transactions must be eliminated to prevent double counting.
## Footnote
Eliminating these transactions ensures that income and expenses are not overstated within the group.
103
# Fill in the blank:
Intercompany dividends are eliminated to avoid \_\_\_\_\_\_.
double taxation
## Footnote
Eliminating intercompany dividends prevents the same income from being taxed multiple times within the same group.
104
List two benefits of filing a consolidated tax return.
* Offset profits and losses
* Simplified reporting
## Footnote
Consolidated returns can reduce overall tax liability and streamline the reporting process for large corporate groups.
105
What is a limitation associated with tax attributes in consolidated returns?
Tax attributes may be limited by individual member's taxable income.
## Footnote
For example, net operating losses (NOLs) of one member cannot exceed the taxable income of that member in the consolidated group.
106
How does the limitation apply to carryforwards in a consolidated group?
Carryforwards are limited to the income of the member that generated them.
## Footnote
This ensures that tax benefits are not disproportionately used by other members of the group.
107
What is the effect of intercompany asset transfers on consolidated returns?
Gains or losses from intercompany asset transfers are deferred.
## Footnote
This deferral prevents artificial inflation or deflation of income until the asset is sold outside the group.
108
# True or False:
All subsidiaries must consent to file a consolidated return.
TRUE
## Footnote
Subsidiaries must consent to be included in a consolidated return, typically by signing a form or agreement.
109
What happens to intercompany inventory profits in a consolidated tax return?
They are eliminated until the inventory is sold to an outside party.
## Footnote
This prevents premature recognition of income within the group.
110
What are the two main types of REITs?
* Equity REITs
* Mortgage REITs
## Footnote
Equity REITs own and operate income-producing real estate, while Mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities.
111
# True or False:
A REIT must distribute at least 90% of its taxable income to shareholders to maintain its tax-exempt status.
TRUE
## Footnote
This distribution requirement allows REITs to avoid corporate income tax, provided they meet other IRS requirements.
112
# Fill in the blank:
To qualify as a REIT, a corporation must have at least \_\_\_\_\_\_% of its assets in real estate, cash, or U.S. Government securities.
75
## Footnote
This requirement helps ensure that the primary business of the REIT is related to real estate.
113
What percentage of a REIT's gross income must come from real estate-related sources?
0.75
## Footnote
The income test requires that most of a REIT's gross income is derived from rents, mortgage interest, or gains from the sale of real estate assets.
114
Describe the taxation of dividends received from a RIC.
* Qualified dividends are taxed at capital gains rates.
* Non-qualified dividends are taxed at ordinary income rates.
## Footnote
RICs, or Regulated Investment Companies, distribute income to investors who are taxed based on the nature of the income.
115
What is the primary reason for a tax-exempt organization's unrelated business income (UBI) to be taxed?
To prevent unfair competition with taxable businesses
## Footnote
UBI is generated from activities not substantially related to the tax-exempt purpose, and taxing it ensures that tax-exempt organizations do not gain an unfair competitive advantage.
116
Identify three tests used to determine if income is considered unrelated business income.
* It is a trade or business.
* It is regularly carried on.
* It is not substantially related to the organization's exempt purpose.
## Footnote
These tests help distinguish between exempt-function income and income subject to unrelated business income tax (UBIT).
117
# True or False:
Income from volunteer-run activities is generally considered unrelated business income.
FALSE
## Footnote
Income from activities where substantially all the work is performed by volunteers is usually exempt from UBIT, as it aligns with the organization's exempt purpose.
118
# Fill in the blank:
A RIC must distribute at least \_\_\_\_\_\_% of its taxable income to avoid excise tax.
90
## Footnote
This distribution requirement allows RICs to pass income to shareholders without being subject to corporate income tax.
119
# Explain:
The term 'unrelated debt-financed income' in the context of tax-exempt organizations.
Income from property acquired with borrowed funds
## Footnote
This income is subject to UBIT as it arises from investments made using borrowed money, which can be seen as competing with for-profit entities.
120
What type of income must be reported on Form 1041?
Income from estates and trusts, including:
* Interest income
* Dividends
* Capital gains
* Rent and royalties
## Footnote
Form 1041 is used to report the income, deductions, and tax liability of estates and trusts. It is similar to Form 1040 for individuals but tailored for the unique aspects of these entities.
121
# True or False:
Trusts can claim a standard deduction on Form 1041.
FALSE
## Footnote
Trusts and estates do not receive a standard deduction like individuals. They must itemize deductions that are allowed under tax law.
122
# Fill in the blank:
Distributable Net Income (DNI) determines the maximum \_\_\_\_\_\_ that can be passed through to beneficiaries.
amount of taxable income
## Footnote
DNI limits the income distribution deduction and the income beneficiaries must report. It's crucial for calculating both the trust's and the beneficiaries' tax liabilities.
123
What is the purpose of the 'throwback rule' for trusts?
To tax beneficiaries on accumulated income from prior years.
## Footnote
The throwback rule is applied to prevent trusts from accumulating income to defer taxes. It ensures beneficiaries pay tax on income that was not distributed in the year it was earned.
124
List three deductions available to trusts on Form 1041.
* Trustee fees
* Legal and accounting fees
* Charitable contributions
## Footnote
These deductions reduce the taxable income of the trust and must be directly related to the administration of the trust.
125
How are grantor trusts taxed?
Income is taxed to the grantor, not the trust.
## Footnote
In a grantor trust, the grantor retains control over the trust's assets and is treated as the owner for tax purposes, meaning the income is included on their personal tax return.
126
# True or False:
All income distributed by a trust is taxable to the beneficiaries.
FALSE
## Footnote
Only the portion of income that is considered Distributable Net Income (DNI) is taxable to beneficiaries. Distributions in excess of DNI are usually considered tax-free returns of capital.
127
Which IRC section allows trusts a deduction for distributions to beneficiaries?
IRC Section 661
## Footnote
Section 661 permits a trust or estate to deduct the amount of income required to be distributed currently to beneficiaries, reducing the fiduciary's taxable income.
128
In what scenario is a trust considered a 'simple trust'?
When it must distribute all income annually and cannot make charitable contributions.
## Footnote
A simple trust requires that all income be distributed to beneficiaries each year and cannot distribute from principal or make charitable contributions.
129
Describe the taxation of capital gains in a trust.
Typically taxed at the trust level unless distributed.
## Footnote
Capital gains are usually part of corpus and are taxed to the trust unless they are included in DNI and distributed to beneficiaries, which can pass the tax responsibility to them.
