Prorate Decedent's Capital Gain Distributions ??

  • Thread starter Michael T Wing CPA
  • Start date

M

Michael T Wing CPA

This question came up in another thread, but hasn't received
much attention. Here goes:

When prorating income between a decedent and his estate, do
you allocate ANY portion of an annual mutual fund capital
gain distribution if the decedent died BEFORE such
distribution was declared and/or received?

For example, say that the taxpayer dies in September. His
mutual fund pays an annual capital gain distribution in
December (the typical pattern for most mutual funds). Must
any of that distribution be allocated to the decedent for
income tax purposes?

MTW
 
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M

Martha Matthews, EA

Michael T Wing CPA said:
This question came up in another thread, but hasn't received
much attention. Here goes:

When prorating income between a decedent and his estate, do
you allocate ANY portion of an annual mutual fund capital
gain distribution if the decedent died BEFORE such
distribution was declared and/or received?

For example, say that the taxpayer dies in September. His
mutual fund pays an annual capital gain distribution in
December (the typical pattern for most mutual funds). Must
any of that distribution be allocated to the decedent for
income tax purposes?
If the DOD was before the declaration of the capital gain
then it is an estate asset (or beneficiary's) and not
prorated on the final 1040.

If the DOD was after the declaration but before the receipt
then it is IRD (income in respect of decedent) It belongs to
the estate/beneficiary and is not included on the final
1040.

Martha Matthews, EA
 
H

Herb Smith

Michael T Wing CPA said:
This question came up in another thread, but hasn't received
much attention. Here goes:

When prorating income between a decedent and his estate, do
you allocate ANY portion of an annual mutual fund capital
gain distribution if the decedent died BEFORE such
distribution was declared and/or received?

For example, say that the taxpayer dies in September. His
mutual fund pays an annual capital gain distribution in
December (the typical pattern for most mutual funds). Must
any of that distribution be allocated to the decedent for
income tax purposes?
Since the taxpayer died before the CG distribution was
declared, I would opine that this income neither goes on the
decedent's final tax return nor is IRD. It is income to the
estate and should be included on the 1041. The estate
"owned" the fund at the time the CGD was declared.
 
D

Dan Evans

Michael T Wing CPA said:
When prorating income between a decedent and his estate, do
you allocate ANY portion of an annual mutual fund capital
gain distribution if the decedent died BEFORE such
distribution was declared and/or received?
Others have opined that it's estate income, not the
decedent's income, and I agree. However, I think you could
make an argument that a portion of the capital gain might be
IRD (income in respect of a decedent).

IRD is income received *after* death (and so reported on the
1041 of the estate or the 1040 of the beneficiary, and not
the decedent's final 1040) which was earned during the
decedent's life and so part of the gross estate.

The capital gains distributed at the end of the year would
include gains realized during the year, including gains
realized before the decedent's death and gains realized
after death on pre-death appreciation, and those realized
and unrealized gains were included in the decedent's estate,
so the capital gains distributed after death would seem to
fall into the definition of IRD, and so generate an income
tax deduction for the estate tax attributable to the
pre-death gains.

The problem would be how to calculate the pre-death gains.
Pro-rating is easy and convenient, but I'm not sure that it
has anything to do with economic reality. A comparison of
fair market values at the beginning of the year, the date of
death, and the end of the year sounds like it might be
closer to the mark, but it still seems unrelated to how
capital gains are realized by mutual funds.

**Dan Evans
**I post information, not advice.
 
D

D. Stussy

Michael said:
This question came up in another thread, but hasn't received
much attention. Here goes:

When prorating income between a decedent and his estate, do
you allocate ANY portion of an annual mutual fund capital
gain distribution if the decedent died BEFORE such
distribution was declared and/or received?

For example, say that the taxpayer dies in September. His
mutual fund pays an annual capital gain distribution in
December (the typical pattern for most mutual funds). Must
any of that distribution be allocated to the decedent for
income tax purposes?
Cash basis: No.

Accrual basis: Only if it is considered as earned ratably
over the year.
 
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M

Michael T Wing CPA

Dan Evans said:
The capital gains distributed at the end of the year would
include gains realized during the year, including gains
realized before the decedent's death and gains realized
after death on pre-death appreciation, and those realized
and unrealized gains were included in the decedent's estate,
so the capital gains distributed after death would seem to
fall into the definition of IRD, and so generate an income
tax deduction for the estate tax attributable to the
pre-death gains.
Hmmm... I understand the theory. However, would this make a
difference:

As I recall, mutual funds are NOT "pass-thru" entities in the
strictest sense of the word. They are not REQUIRED to distribute
their capital gains. Instead, they can elect to retain them and
pay tax at the entity level. (Granted, this is rare. I've only
seen it once or twice in 27 years.)

Anyway, my point is that I don't think you would have an IRD
issue PRIOR to the point in time when the fund DECLARES the CG
dividend. But, who knows...it's an interesting question. <g>

MTW
 
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