During the course of its administration, an estate may receive income that is subject to federal income tax. When, and if, an estate receives such income the executor is faced with the task of filing the estate's income tax return along with a number of related considerations. One of the more important considerations is the allocation of the burden of such tax between the beneficiaries of the estate and the estate itself.
Subchapter J of the Internal Revenue Code provides the mechanism to allocate that burden between the beneficiaries and the estate. Generally, Subchapter J attempts to allocate the tax liability according to the amount of income the estate retains and the amount of income which it distributes to beneficiaries. It does so, generally, by providing the estate an income tax deduction for amounts of income distributed to beneficiaries.
United States Trust Co. v. I.R.S. involved this precise issue. The estate sought to deduct income it had distributed to a charitable beneficiary so that it would not be subject to any income tax liability with respect to this income. The government challenged the validity of this deduction. The government contended that the tax liability relating to such income was totally eliminated, rather than being allocated, because the charitable beneficiary was exempt from federal income tax. In holding for the estate, the court rested its decision on a literal reading of the statutory framework of Subchapter J.
Brackett, Scott D.
"United States Trust Co. v. I.R.S.,"
Akron Law Review: Vol. 20
, Article 6.
Available at: https://ideaexchange.uakron.edu/akronlawreview/vol20/iss1/6