Trust Distribution

[Snaggletooth]

Can a trust "accrue" a distribution, so long as the distribution is made by the due date of the tax return?

We've got a QSST, qualified subchapter S trust. S Corp has a fiscal year of Sept 30. One of the conditions for trust to remain a QSST is for "all accounting income" of the trust to be distributed, to the extent required in the trust instrument. Trust instrument requires that all accounting income be distributed annually.

S corp typically does not know it's income until after Feb 1, and issues its K-1 with an effective date of Sept 30 of the previous year.

Trust has a fiscal year ended Dec 31, thus will receive a K-1 from the S Corp for its share of income. Distribution of that income to the beneficiaries cannot occur until the amount of income is known.

Can the trust be put on an accrual basis, distribute the "accounting income" before March 15th, and claim a distribution on its Form 1041, Schedule B?

[veritas]

Unusual fiscal year for an S Corp

September 30th?

Sec 444 only allows a deferral of 3 months.

It's not impossible but how did they get that fiscal year end?

[Snaggletooth]

Government contractor

Been that way for 20+ years. September 30th coincides with the end of the government's fiscal year, so it is a matter of convenience and congruence.

At the time the election was made, the deposit was not required. As it stands, they have to keep a deposit of 38% of profit for one calendar quarter.

Interesting sidelight, but is only remotely related to original question. We can substitute Dec 31 for the fiscal year end, and the question remains the same -- the February fuse is only 3 months shorter...

[veritas]

I guess what made

me start thinking about it was, would having a QSST as a shareholder terminate the fiscal year end of the S Corporation?

It appears not in the case of a QSST.

Sorry for the sidelight.

[veritas]

From Kleinrock's

The final requirement for QSST status is that all of the income of the trust must be distributed (or must be required to be distributed) to one individual who is a citizen or resident of the United States. 39 Under this rule, the terms of the trust must require all of the income to be distributed, or if the trust instrument is silent on this matter, the trust must in fact distribute all of its income to the beneficiary. 40 For these purposes, the "income" of the trust is determined under the terms of its governing instrument and applicable local law. Unless otherwise provided under local law, trust income includes distributions from the S corporation but does not include the trust's pro rata share of the S corporation's items of income, loss, deduction, or credit. The pro rata S corporation income flows directly through to the QSST beneficiaries as the S corporation shareholders. 41 The IRS has ruled that the payment of taxes to taxing authorities is treated as a deemed distribution to the income beneficiary. PLR 9142029.

[Snaggletooth]

Good Information

...great cite, Veritas - thank you. Sometimes it is helpful to quantify with an example, if it doesn't get too long and involved. Let me try to do that, using your information above.

Shareholders:
1) Father 60%
2) Mother 10%
3) QSST 30%

Total Sub S Profit: $1,000,000. K-1 to father, $600,000; to mother $100,000; to the QSST $300,000. QSST taxable income is thus $300,000.

At the quarterly intervals, the S Corp has had to pay IRS for its shareholders' estimated taxes. Total of taxes paid at 38% rate is $380,000. $266,000 was paid directly to IRS for father and mother filing joint return. The S Corp had to declare dividends, as these payments are deemed to be dividends. The remaining $114,000 was paid to IRS and deemed to have been paid for the trust beneficiary, according to Kleinrock. No other payments were made by the corporation to shareholders other than the tax payments.

Let's see what the fallout consists of. Parents have $700,000 in income, and can claim a credit for $266,000 in estimated tax payments. Fair enough.

Trust receives $300,000 in taxable income via the K-1. It has made a deemed distribution of $114,000 to its beneficiary. The trust thus has taxable income of $186,000 upon which it must now pay additional taxes. It is not required to distribute anything since it received no real money and had no other expense, thus there is no "accounting income."

The beneficiary gets a K-1 from the trust, form 1041. Beneficiary must report income of $114,000. However, beneficiary has estimated tax payments of $114,000.

Would this be correct? (Thanks to any of you who have read this far...)

[veritas]

Here's the way I understand it

The beneficiary of the QSST reports income from the S-Corp, so the 300k flows directly through to the beneficiary.


The income to be distibuted in your example is the estimated tax payment.