Revocable living trusts as partnership partners

Discussion in 'Tax' started by ira smilovitz, Feb 20, 2014.

  1. This is a question that probably has little import except to anal retentive worriers, but...

    Form 1065 Schedule B question 2 asks if any partners are "a disregarded entity, (...) a trust (...)"

    Schedule K-1 item I1 asks what type of entity is the partner.

    The instructions for Schedule K-1 Item E state to use the SSN for individuals, and the EIN for other entities.

    Since revocable living trusts with the grantor as the trustee and beneficiary are disregarded entities for federal taxation, and their tax returns are filed by the grantor using his/her SSN as an individual, what are the correct answers for the Form 1065 questions? Is Schedule B, Q2 yes or no? Is the K-1 entity type individual or trust?

    (Citations to support an answer would be especially useful.)

    Ira Smilovitz

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    ira smilovitz, Feb 20, 2014
    #1
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  2. ira smilovitz <> wrote:

    > Form 1065 Schedule B question 2 asks if any partners are "a
    > disregarded entity, (...) a trust (...)"
    >
    > Schedule K-1 item I1 asks what type of entity is the partner.
    >
    > The instructions for Schedule K-1 Item E state to use the SSN
    > for individuals, and the EIN for other entities.
    >
    > Since revocable living trusts with the grantor as the trustee
    > and beneficiary are disregarded entities for federal taxation,
    > and their tax returns are filed by the grantor using his/her SSN
    > as an individual, what are the correct answers for the Form 1065
    > questions? Is Schedule B, Q2 yes or no? Is the K-1 entity type
    > individual or trust?


    I was unable to find any regulation or statute that directly
    addressed this issue. But if you look at the grantor trust
    statutes (sections 671 et seq.) they include the following phrase,

    "The grantor shall be treated as the owner of any portion of a
    trust..."

    If the grantor is treated as the owner, my approach would be to
    treat him/her as the owner not only for his own return, but for the
    purposes of K-1's as well.

    --
    Stu
    http://DownToEarthLawyer.com

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
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    << to this newsgroup as well as our anti-spamming policy >>
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    << Copyright (2011) - All rights reserved. >>
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    Stuart A. Bronstein, Feb 20, 2014
    #2
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  3. On Thursday, February 20, 2014 10:56:25 AM UTC-5, Stuart A. Bronstein wrote:
    > ira smilovitz <> wrote:
    >
    >
    >
    > > Form 1065 Schedule B question 2 asks if any partners are "a

    >
    > > disregarded entity, (...) a trust (...)"

    >
    > >

    >
    > > Schedule K-1 item I1 asks what type of entity is the partner.

    >
    > >

    >
    > > The instructions for Schedule K-1 Item E state to use the SSN

    >
    > > for individuals, and the EIN for other entities.

    >
    > >

    >
    > > Since revocable living trusts with the grantor as the trustee

    >
    > > and beneficiary are disregarded entities for federal taxation,

    >
    > > and their tax returns are filed by the grantor using his/her SSN

    >
    > > as an individual, what are the correct answers for the Form 1065

    >
    > > questions? Is Schedule B, Q2 yes or no? Is the K-1 entity type

    >
    > > individual or trust?

    >
    >
    >
    > I was unable to find any regulation or statute that directly
    >
    > addressed this issue. But if you look at the grantor trust
    >
    > statutes (sections 671 et seq.) they include the following phrase,
    >
    >
    >
    > "The grantor shall be treated as the owner of any portion of a
    >
    > trust..."
    >
    >
    >
    > If the grantor is treated as the owner, my approach would be to
    >
    > treat him/her as the owner not only for his own return, but for the
    >
    > purposes of K-1's as well.
    >
    >
    >
    > --
    >
    > Stu
    >
    > http://DownToEarthLawyer.com


    Thank you. The reference to the grantor trust code sections and the associated regs were on point.

    Ira Smilovitz

    --
    << ------------------------------------------------------- >>
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    << nor can it used, for the purpose of avoiding penalties >>
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    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
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    ira smilovitz, Feb 22, 2014
    #3
  4. ira smilovitz

    MTW Guest

    On Thursday, February 20, 2014 5:15:14 AM UTC-8, ira smilovitz wrote:

    > Since revocable living trusts with the grantor as the trustee and beneficiary
    > are disregarded entities for federal taxation, and their tax returns are
    > filed by the grantor using his/her SSN as an individual, what are the correct
    > answers for the Form 1065 questions? Is Schedule B, Q2 yes or no? Is the K-1
    > entity type individual or trust?


    My view (no citations) is that you should answer these questions in a manner that is consistent with the partnership's records. Whether an entity is "disregarded" is generally a determination that would be made on the entity owner's 1040, and strictly speaking that determination probably isn't any business of the partnership.

    So, if the partnership records indicate that the owner is a trust, I would answer question B/2 "yes." If the only tax ID number provided by the owner is an SSN, then that is what I would use on the K-1. And I would reflect the owner's entity type on the K-1 as "trust."

    Why is it the partnership's business to investigate or disagree with the owner's chosen characterization??? :)

    MTW

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    MTW, Feb 24, 2014
    #4
  5. MTW <> wrote:
    > ira smilovitz wrote:
    >
    >> Since revocable living trusts with the grantor as the trustee
    >> and beneficiary are disregarded entities for federal taxation,
    >> and their tax returns are filed by the grantor using his/her
    >> SSN as an individual, what are the correct answers for the Form
    >> 1065 questions? Is Schedule B, Q2 yes or no? Is the K-1 entity
    >> type individual or trust?

    >
    > My view (no citations) is that you should answer these questions
    > in a manner that is consistent with the partnership's records.
    > Whether an entity is "disregarded" is generally a determination
    > that would be made on the entity owner's 1040, and strictly
    > speaking that determination probably isn't any business of the
    > partnership.


    The entity owners are the partners, including the revocable trust.
    The trustee of the trust supplies the partnership with the trust's
    tax ID number, which is usually the SS number of the grantor.

    On Form 1065, it specifically asks if any of the partners are
    disregarded entities. Doesn't that include a grantor trust? If
    so, it is the business of the partnership.

    > So, if the partnership records indicate that the owner is a
    > trust, I would answer question B/2 "yes." If the only tax ID
    > number provided by the owner is an SSN, then that is what I
    > would use on the K-1. And I would reflect the owner's entity
    > type on the K-1 as "trust."


    Sounds like what the IRS is looking for.

    > Why is it the partnership's business to investigate or disagree
    > with the owner's chosen characterization??? :)


    They don't have to disagree with it - they only have to ask how the
    partner wants to characterize it.

    --
    Stu
    http://DownToEarthLawyer.com

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
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    Stuart A. Bronstein, Feb 24, 2014
    #5
  6. ira smilovitz

    D. Stussy Guest

    "MTW" wrote in message
    news:...

    On Thursday, February 20, 2014 5:15:14 AM UTC-8, ira smilovitz wrote:
    > Since revocable living trusts with the grantor as the trustee and
    > beneficiary
    > are disregarded entities for federal taxation, and their tax returns are
    > filed by the grantor using his/her SSN as an individual, what are the
    > correct
    > answers for the Form 1065 questions? Is Schedule B, Q2 yes or no? Is the
    > K-1
    > entity type individual or trust?


    My view (no citations) is that you should answer these questions in a manner
    that is consistent with the partnership's records. Whether an entity is
    "disregarded" is generally a determination that would be made on the entity
    owner's 1040, and strictly speaking that determination probably isn't any
    business of the partnership.

    So, if the partnership records indicate that the owner is a trust, I would
    answer question B/2 "yes." If the only tax ID number provided by the owner
    is an SSN, then that is what I would use on the K-1. And I would reflect the
    owner's entity type on the K-1 as "trust."

    Why is it the partnership's business to investigate or disagree with the
    owner's chosen characterization??? :)
    =============

    Perhaps the partnership has shares in an S-corp. A non-grantor type trust
    may disqualify the 1361(b) election. Cf. 1361(c)(2) for trusts that don't.

    A non-resident alien shareholder also disqualifies the election. Therefore,
    a partnership with an NRA partner is a problem....

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    D. Stussy, Feb 24, 2014
    #6
  7. ira smilovitz

    MTW Guest

    On Monday, February 24, 2014 8:37:22 AM UTC-8, D. Stussy wrote:
    >
    > Perhaps the partnership has shares in an S-corp. A non-grantor type trust
    > may disqualify the 1361(b) election. Cf. 1361(c)(2) for trusts that don't.
    >
    > A non-resident alien shareholder also disqualifies the election. Therefore,
    > a partnership with an NRA partner is a problem....


    If those situations were actually present, then yes, I presume the partnership would have to gather sufficient information to address them. But this has nothing to do with the original question in this thread which was whether the partnership should treat the trust as an "individual" rather than a "trust" on the K-1 and in related questions.

    MTW

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    MTW, Feb 24, 2014
    #7
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