Opinion ID: 3010690
Heading Depth: 2
Heading Rank: 4

Heading: Distributions and Tax Returns

Text: The estate reported no distributable net income (DNI) for fiscal years 1984 and 1985.5 For tax year 1984 the estate reported negative taxable income of $860,171 and incurred actual losses of $369,517. For tax year 1985 the estate reported negative taxable income of $379,955 and incurred actual losses of $327,946. The trustees, who were also representatives of the estate, did not file any Form 1041 Fiduciary Income Tax Returns and did not report any interest income for the tax year ended February 28, 1984. For the tax year ended February 28, 1985, the trustees filed a Form 1041 for each of the trusts, but filed them in February 1986, nine months after they were due. The Form 1041 for Trust C reported that Trust C had received $101,890 in DNI during fiscal year 1985, consisting of Trust C's 30% share of the trusts' taxexempt municipal bond interest and its 30% share of the transfers made to the trusts in connection with the E.F. Hutton margin advances and the La Playa and Blue Grass mortgage holdings. Although the Form 1041 indicated that the entire $101,890 had been distributed to Geftman, only $46,936 actually was distributed while the rest remained in an E.F. Hutton account to which neither Geftman nor his legal guardian had access. See app. at 135, 216-20.6 _________________________________________________________________ 5. The Distributable Net Income of an estate or a trust determines the amount that a beneficiary receiving a distribution from the estate or trust must include in the beneficiary's gross income. See 26 U.S.C. S 662(a). DNI generally consists of the taxable income of the estate or trust, subject to certain modifications. See 26 U.S.C. S 643(a). 6. The Schedules K-1 attached to the Form 1041 for Trust A indicated that Love, Welt, and Creedy each received trust distributions of $13,136. See app. at 206-08. 8 Geftman, who received only $2,620 in income apart from the trust distribution, see app. at 126, did not file an income tax return for 1985. On July 3, 1991, the Commissioner of Internal Revenue (Commissioner) issued Geftman a Notice of Deficiency finding him liable for an income tax deficiency of $13,043 on the grounds that $48,693 of the $101,890 distribution reported on the Form 1041 was taxable. The Commissioner also imposed additions to tax due to Geftman's failure to file a return or pay estimated tax on the distributions. See app. at 137-39. Geftman filed a timely petition in the United States Tax Court contesting the asserted deficiency and additions to tax. He contended that his entire distribution from Trust C, which the Commissioner now stipulates totaled $46,936 rather than $101,890, was non-taxable pursuant to 26 U.S.C. S 662(b) and Treas. Reg. S 1.662(b)-1 because, contrary to the trustees' representations on the Form 1041, all of the income to Trust C was non-taxable. According to Geftman, the trustees had mischaracterized the transfers from the estate as taxable interest income paid to the trusts in their capacity as creditors in the margin loan transactions and as holders of the La Playa and Blue Grass mortgages when in reality those transfers constituted nontaxable distributions to the trusts as beneficiaries of an estate which did not have any distributable net income. See 26 U.S.C. S 662(a).