he lived; and also for the preceding year if the decedent died before the time for filing returns for such year had expired and no return had been filed by him. Thus, if a decedent died in February, 1917, without having made a return for 1916, the executor or administrator is required to file a return for 1916 and a return for the part of 1917 in which the decedent lived. The income tax due from a deceased person is a debt against the estate in the hands of his executor or administrator and under the authority of the law 13 the Treasury Department requires the executor or administrator to file a return for the decedent covering the unreported income received by the decedent up to the time of death, in order that the amount due to the Government from the decedent's estate may be determined and paid.14 If the net income of the decedent, from January 1 of the year in which he died to the date of his death, was less than the sum which would have made him liable to make a return if living, no return is required by the executor or administrator.15 The personal exemption which may be deducted from the decedent's income so reported, under the 1916 Law and the 1917 Law respectively, is the full amount allowed to living persons of the same status as that of the decedent at the time of his death.16 Receiver. Where a receiver for an individual, acting under interlocutory orders of the court, receives income during any year on funds which he holds in trust as 13 Act of September 8, 1916, § 9 (g). 14 T. D. 2152. 15 Act of October 3, 1917, § 3; see also T. D. 2090 and Regs. 33, Art. 17. 16 See Chapter 4, paragraph on personal exemption. such receiver, such income must be accounted for and the tax paid thereon for that year. The receiver is indemnified against the claims or demands of every beneficiary and shall have credit for the amount of such payments against the beneficiary or principal in any accounting which he makes as such receiver. The income being thus freed of tax liability imposed by statute, it assumes the status of capital and may thereafter be distributed by the receiver in the same manner as other capital. The fact that all or any part of the income received by a receiver may be used to pay creditors does not relieve the receiver from first paying the tax on all income received by him, less the deductions, credits and exemptions allowed by the law-the Government has a prior lien for the amount of the tax; what remains may be distributed to creditors or others.17 Trust Estates. In the following discussion of the subject of fiduciaries the term "trust estates" is used as meaning the estate or property over which the fiduciary has control, whether he be a guardian, trustee, executor, administrator, receiver, or otherwise. Income of Trust Estates. The income of a trust estate embraces the income from all sources, as in the case of individuals, excluding exempt income. The chapters on the subject of income should be read in this connection. The corpus of the estate, that is, the amount of the capital transferred to the estate at the time of its creation, is not income. Thus, in the case of decedents' estates the appraised value of the property at the time of the death of the decedent 17 Letter from Treasury Department dated February 9, 1917; I. T. S. 1917, ¶ 2008. is the capital of the estate, regardless of the fact that the cost of that property to the decedent may have been much less. All income derived from such property after the death of the decedent is income to the estate. Income derived by the decedent before his death is capital when received by the estate. The rules laid down by the courts with respect to the difference between income and capital in cases between life tenant and remainderman do not necessarily apply under the provisions of the income tax law, so far as assessing the tax is concerned. Thus, extraordinary dividends received by an estate are income to the same extent as if received by an individual, although a part of the fund from which such dividend is declared may have been earned by the corporation prior to the creation of the estate. Deductions Allowed Trust Estates. A trust estate is allowed, in general terms, the same deductions as are allowed to individuals. The Treasury Department, however, has made several special rulings with respect to deductions which may be claimed by fiduciaries against the income of trust estates and these rulings are given in the following paragraphs. BUSINESS EXPENSES. The usual and necessary expenses of carrying on a business which may be conducted by the fiduciary including salaries, wages, rentals, repairs to business properties, etc., are held to be properly deductible, since they are expenses which reduce the income accruing to the beneficiaries.18 EXPENSES NOT DEDUCTIBLE. A distinction is made between such expenses as are properly chargeable against 18 T. D. 2135. the corpus of an estate at the time of its creation, and such other expenses incident to administration, as may arise from the nature of the properties and the details of business management. Thus, court costs, attorneys' fees, executors' commissions, etc., are held generally to be expenses that reduce the corpus of the estate in the administrator's hands and not expenses which directly reduce the income accruing to the beneficiaries. Therefore such expenses are not a proper deduction from the annual income.19 EXECUTORS' COMMISSIONS. If under the laws of the state or the terms of the will or the decree of a court executors' commissions are deductible from the corpus of the estate they should not be included as deductions in the annual return of the fiduciary, but if they are to be deducted from the income of the estate distributable among the beneficiaries the amount should be entered as a legitimate and necessary expense.2 20 INTEREST. Any interest which a trust estate may be required to pay to creditors is a proper reduction, except interest or indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from the income tax.20a TAXES. Any tax paid by a trust estate is a proper deduction to the same extent as in the case of individuals or corporations. Inheritance taxes are held not to be deductible 21 19 T. D. 2090; T. D. 2135. 20 Letter from Treasury Department dated March 2, 1915; I. T. S. 1917; ¶ 660. 20a See Chapter 29. 21 See Chapter 30 on deduction for taxes. F. I. Tax.-6 LOSSES. Losses actually sustained during the year, incurred in business or trade, or arising from fires, storms, shipwreck, or other casualty, and from theft, not compensated for by insurance or otherwise may be deducted under the same rules as are applicable to individuals.22 In case the estate was created prior to March 1, 1913, a loss sustained by the sale of property is determined by the fair market price or value of the property as of that date. If the estate was created subsequent to March 1, 1913, the loss is determined on the basis of the appraised value of the property at the time the decedent died or the estate was created.23 DEPRECIATION. The general rules relating to depreciation 24 are modified in the case of trust estates, by the following ruling of the Treasury Department: In the case of a trust estate where the terms of the will or trust, or the decree of a court of competent jurisdiction, provide for keeping the corpus of the estate intact, and where physical property, forming a part of the corpus of such estate, has suffered depreciation through its employment in business, a deduction will be permitted for depreciation, if the deduction is applied or held by the fiduciary for making good such depreciation. No depreciation deduction will be permitted to fiduciaries other than as here provided. Fiduciaries should set forth in connection with their returns the provision of the will or trust or decree requiring such depreciation deduction, where any exists, or that actual depreciation occurs, the amount thereof, and that the 22 See Chapter 31 on Deduction of losses. 23 Telegram from Treasury Department dated February 3, 1917; I. T. S. 1917, ¶ 1999. 24 See Chapter 32. |