Estate Tax Deduction possible?

Technical topics regarding tax preparation.
#1
adamant  
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So, not so hypothetical situation here. I have changed John's name to protect his anonymity.

John has a note to a corporation. Said note has a principle balance of $1.5M and accrued interest of $2.5M when he died in July of 2021.

A note for $2.5M is includable in his estate, because that is the FMV of the note. This note is not discounted in any way, because in January of 2022 it was paid in full.

John's estate didn't have a tax liability for the $1M of interest income, because as a cash-basis taxpayer, no income was recognized until 2022 when the interest was received.

I am not liking this result since the loan's FMV is includable, but the inherent tax liability seems not to be includible as a deduction due to timing.

Is there a special provision here? For instance, legal claims that existed at the time of death, but were not paid until later.

I'm getting a bit muddled here, because this liability will show up on a future year tax return.
 

#2
MilesR  
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I'm curious if there's a special provision too. According to Treas Reg 20.2053-6(f), "Unpaid income taxes are deductible if they are on income property includible in an income tax return of the decedent for a period before his death. Taxes on income received after the decedent's death are not deductible."

https://www.law.cornell.edu/cfr/text/26/20.2053-6
 

#3
adamant  
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Yes, the general rule is taxes "Accrued" as of the date of death. The tax liability was accrued in principle, but not actually.

I'll keep digging. Thanks for chiming in Miles
 

#4
sjrcpa  
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What if the estate's year end is June 2022?
 

#5
adamant  
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Fantastic idea.

I've never made that election, but I will talk with the client's CPA that is preparing those returns.

I think that may work, but not sure if the election period is over or not.
 

#6
sjrcpa  
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You choose the estate year end on the initial return. Hope it hasn't been filed yet.
 

#7
adamant  
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Perfect, thank you.
 

#8
adamant  
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Looks like this is a trust that has been alive for a few years, so I think we're out of luck unless I can find an exception.
 

#9
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Is the note in the trust or the estate?
This fact pattern reminds me of IRAs. Value is determined for estate tax purposes without reference to the income tax liability inherent in a distribution.
Steve
 

#10
adamant  
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Note is in the trust, which has filed a tax return for a few years. Calendar year.
 

#11
Doug M  
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This note is not discounted in any way, because in January of 2022 it was paid in full.


What was actually paid? $4.0 million (1.5 + 2.5)???

A note for $2.5M is includable in his estate
This statement does not make sense. First the note was $1.5 and now $2.5.
 

#12
TheGrog  
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I think he meant that the total of the principle + accrued interest was 2.5M, 1.5M principle & 1M interest, as he states that there is 1M in interest income and a 2.5M balance on the note shortly after.
 

#13
adamant  
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Yes, I saw that mistake this morning and couldn't find how to fix it. $1M of accrued interest.

So 1.5M of principal and 1M of interest paid in the following tax year.
 

#14
Doug M  
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Hi Adam. Sorry for overlooking your last post. Is the trust what we call a living trust? Revocable until date of death, then becomes irrevocable?

Is the note in the name of the trust? You state the interest was paid to the trust. Can you give us some dates. DOD. Was the trust in existence when John was alive?

The trust can elect to be an estate for estate tax purposes. What I am worried about is the $1.0 million interest income if not distributed to the trust beneficiaries. The election to go fiscal year gets you a lot more time to plan.
 

#15
adamant  
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Note in the name of the trust, it was funded to the trust at the passing of TP's spouse.
I just learned that the trust has filed a tax return since that date., several years ago.
TP died in 2021.
Note was paid off when property sold in 2022.
 

#16
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I don't see any relief in your fact pattern. It looks pretty straightforward to me.
Steve
 


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