N.Y. Comp. Codes R. & Regs. tit. 20 § 119.3

Current through Register Vol. 46, No. 51, December 18, 2024

Section 119.3 - Alternate method of attributing modifications among estate, trust and its beneficiaries

Tax Law, § 619(d)

(a)

(1) The alternate method of attributing modifications may be used by a fiduciary only when the attribution of the fiduciary adjustment, pursuant to section 119.2 of this Part, results in an inequity which is substantial both in amount and in relation to the amount of the New York fiduciary adjustment (see subdivision [c] of this section).

(2) Where the fiduciary adjustment, as defined in section 119.1 of this Part, includes New York State modifications which consist of or relate to items of income, gain, loss or deduction which are charged or credited to corpus or principal for probate or trust accounting purposes, under local law or under the governing instrument, or items in which income beneficiaries do not share pro rata, the fiduciary, subject to subdivision (b) of this section, in lieu of determining the share of the fiduciary adjustment under section 119.2 of this Part, may attribute the respective shares of an estate or trust and its beneficiaries in such fiduciary adjustment:

(i) by attributing the modifications described in section 119.1 of this Part to the estate, trust or beneficiaries, as the case may be, in the manner in which the items of income, gain, loss or deduction which give rise to such modifications are attributed to the estate, trust or beneficiaries under local law or the governing instrument; and

(ii) by allocating the remainder of the modifications which comprise the fiduciary adjustment in accordance with subdivision (a) or (b) of section 119.2 of this Part.

Exception:

Those modifications, or portions thereof, which are not includible in the New York fiduciary adjustment in accordance with the provisions of paragraph (c)(1) of section 119.1 of this Part must be attributed to the estate or trust in determining its New York taxable income regardless of whether an alternate method provided by this section is used by the fiduciary.

(3) Items of income, gain, loss or deduction charged or credited to corpus or principal for probate or trust accounting purposes include, for example, the following:

(i) nondistributable capital gains and losses;

(ii) income in respect of a decedent under section 691 of the Internal Revenue Code, e.g., the portion of any interest income on obligations of the United States, of states other than New York or of their instrumentalities which became payable after death but accrued before death; and

(iii) state or foreign income taxes paid or incurred during the taxable year to the extent allowed as deductions for Federal income tax purposes and attributable either to nondistributable capital gains or to income in respect of a decedent.

(4) Items in which income beneficiaries do not share pro rata include, for example, amounts with respect to which the governing instrument provides:

(i) that all interest income received from tax exempt state or municipal bonds, including bonds of states other than New York and of their instrumentalities, be paid to a designated beneficiary, with all other income to be divided equally among the designated beneficiary and other beneficiaries;

(ii) that all dividends and interest be paid to a designated beneficiary, with all capital gains distributable to a different beneficiary;

(iii) that a fixed annuity be paid out of the income to a designated beneficiary, with the remainder of income to be accumulated or distributed to other beneficiaries; and

(iv) any combination of the foregoing.

(5) Where a modification is subject in part to the alternate method described in subparagraph (i) of paragraph (2) of this subdivision, and in part to the provisions of subparagraph (ii) of such paragraph, the amount to be allocated in accordance with such subparagraph (i) is the proportion of the total modification which the amount of income, gain, loss or deduction attributable to corpus or principal, or to a specially designated beneficiary under local law or governing instrument, bears to the total amount of such income, gain, loss or deduction.

Example:

The estate of a decedent who died on October 31, 1978 collects $26,000 representing income accrued prior to the date of the decedent's death which constituted corpus or principal for probate or trust accounting purposes. The amount so collected is includible in the estate's Federal and New York taxable income for the first taxable year of the estate, ending June 30, 1979, subject to allowance of a deduction, under section 691(c) of the Internal Revenue Code, for the portion of the Federal estate tax attributable to the amount of accrued income included in the Federal gross estate. During the second taxable year of the estate, ended June 30, 1980, the estate pays a New York State personal income tax of $3,587 (rounded off to the nearest whole dollar amount) for the year ended June 30, 1979, its first taxable year. During the taxable year ended June 30, 1980, it distributes to the sole beneficiary $14,425 out of its Federal distributable net income of $27,200 (i.e., 53.033 percent of Federal distributable net income). The New York State personal income tax of $3,587 is the only New York State modification applicable to the estate for the year ended June 30, 1980. Since the beneficiary received 53.033 percent of the Federal distributable net income of the estate, the beneficiary's share of the New York fiduciary adjustment computed under section 119.2(a) of this Part would amount to $1,902 (i.e.,53.033 percent of $3,587).

However, under the method prescribed in this subdivision, the $3,587 modification for the taxable year ended June 30, 1980 would be attributable to the estate and the beneficiary in the following manner:

Data from Fiduciary Return or Fiscal Year Ended June 30, 1979:
Income accrued before death	$26,000
Deduction for Federal estate tax attributable to income accrued before death (under section 691[c] of the Internal Revenue Code)	2,600
Income accrued before death reduced by deduction attributable thereto	$23,400
Gross income accrued and received after death	$16,000
Deduction for distribution to beneficiary	3,000
Such income reduced by deduction directly related thereto	13,000
Total	$36,400
Specific exemption	600
Federal and New York taxable income of estate	$35,800
New York State personal income tax of estate (see section 602[e] of the Tax Law)	$3,587
Percentage of New York State personal income tax allocated to income accrued before death:
$23,400 = 64.286%
$36,400
Percentage of New York State personal tax allocated to income accrued after death:
$13,000 = 35.714%
$36,400
Allocation of New York State Personal Income Tax Modification
Total New York State personal income tax modification	$3,587
Amount of New York State personal income tax deduction modification attributed to the estate under subparagraph (2)(i) of this subdivision-64.286% of $3,587 =	$2,306
Amount of New York State personal income tax deduction to be attributed under subparagraph (2)(ii) of this subdivision-35.714% of $3,587 =	$1,281
Amount attributed to the estate under subparagraph (2)(ii) of this subdivision-46.96% of $1,281 =	$602
Amount attributed to beneficiary under subparagraph (2) (ii) of this subdivision-53.033% of $1,281 =	679
Total amount of New York State personal income tax deduction	$1,281
Combined Shares of New York Fiduciary Modification
Estate's share under subparagraph (2)(i) of this subdivision	$2,306
Estate's share under subparagraph (2)(ii) of this subdivision	602	$2,908
Beneficiary's share of modification under subparagraph (2)(ii) of this subdivision	679
Total New York fiduciary adjustment	$3,587
The inequity requirement defined in subdivision (c) of this section is met because the difference in the amounts (attributable to the beneficiary) referred to in paragraph (1) of subdivision (c) of this section is more than $1,000 as shown in the following computation:
Beneficiary's share pursuant to section 619 (c)(1) of the Tax Law (see section 119.2 of this Part)	$1,902
Beneficiary's share pursuant to alternate method	679
Difference	$1,223
In addition, $1,223, the difference in amounts, exceeds 15 percent of $3,587, the arithmetic total of all modifications comprising the New York fiduciary adjustment (see subdivision [c] of this section).

(6) If a modification allocable in accordance with subparagraphs (i) and (ii) of paragraph (2) of this subdivision applies to two or more beneficiaries, the amount to be attributed to each party is the proportion of the modification which the related item of income, gain, loss or deduction allocated to each beneficiary bears to the total amount of income, gain, loss or deduction attributable to all beneficiaries who share therein.

Example:

Under an agreement of trust, the trustee is required to pay A and B, the grantor's children, all interest from tax-exempt State and municipal bonds, including bonds of states other than New York and their political subdivisions. All other income of the trust is to be divided equally among A and B and the grantor's sisters, C and D. During the year 1979, the trust receives $10,000 of interest on obligations of the State of California which, under section 112.2(a) of this Article, constitutes a New York State modification increasing Federal adjusted gross income. This is the only modification applicable to the income of the trust for 1979. In 1979, the trust also received $20,000 of income from dividends. Under the method of attribution prescribed in this section, the entire $10,000 interest from the California bonds represents a modification to be attributed only to beneficiaries A and B, and such modification should be divided between them in proportion to their equal shares of the bond interest under the governing instrument, i.e., 50 percent of the $10,000 modification, or $5,000 to each. No part of the modification is attributable to C or D because the modification is an item attributed solely to A and B under the governing instrument. Except for the permission granted by this section to attribute modifications as described herein, the shares of C and D in the New York fiduciary adjustment computed under section 119.2(a) of this Part would amount to $1,666.67, representing their respective 16 ²/₃percent shares of the New York fiduciary adjustment of $10,000. (C's and D's respective shares of Federal distributable net income are 16 ²/₃ percent because each receives $5,000 out of a total trust income of $30,000.)

(b)Rules for use of alternate method of attributing modifications.

(1) A fiduciary using this method must file a schedule setting out the information provided in subdivision (d) of this section as part of the New York fiduciary return (form IT-205).

(2) If a estate or trust has more than one modification which qualifies for allocation under this section, the alternate attribution method described herein may be used only if the fiduciary elects to apply it to all such qualifying modifications.

(3) Discretion to use the method set forth in this section vests solely in the fiduciary. Use of the method by the fiduciary for any taxable year is binding upon all beneficiaries (including remaindermen) of the estate or trust and no such beneficiary may use any method of attribution which has not been properly used by the fiduciary.

(4) An election by the fiduciary to use the alternate method provided herein for any taxable year is effective only for that year and may be revoked only with the permission of the Tax Commission upon such terms and conditions as the commission may prescribe.

(c)Determination of whether inequity is substantial.

(1) As used in this subdivision, the term inequity means the difference between:

(i) the amount, if any, of the taxpayer's share in the New York fiduciary adjustment computed pursuant to subdivision (a) or (b) of section 119.2 of this Part; and

(ii) the amount, if any, of the share of the same taxpayer in the New York fiduciary adjustment allocated to such taxpayer giving effect to the alternate method of attribution described in this section.

(2) An inequity is considered to be substantial in amount if it exceeds $1,000 in the case of any one taxpayer.

(3) An inequity is considered substantial in relation to the amount of the New York fiduciary adjustment only if, with respect to any one taxpayer, it represents at least 15 percent of the arithmetic total of all modifications comprising such fiduciary adjustment, determined without regard to whether the separate modifications have the effect of increasing or decreasing New York taxable income.

(4) In order for the fiduciary to be entitled to elect the alternate method, a substantial inequity need only be present as to one party, i.e.,the estate or trust or one of the beneficiaries.

Example:

The Federal fiduciary income tax return of a trust for 1979 consisted of the following items of income which constitute modifications required by section 612 of the Tax Law (Part 112 of this Article):

United States bond interest-decrease	$15,000
California bond interest-increase	10,000
New York fiduciary adjustment-decrease	$5,000

The trust has two beneficiaries, A and B. Under the trust agreement, beneficiary A receives all the interest on United States bonds. Beneficiary B receives all the California bond interest. In accordance with section 119.2(a) of this Part, the New York fiduciary adjustment is allocated on the basis of the Federal distributable net income. This results in attributing $3,000 of the net New York fiduciary adjustment to A:

^{($15,000 × $5,000)}/_($25,000) = $3,000

and $2,000 to B:

^{($10,000 × $5,000)}/_($25,000) = $2,000

Use of the alternate method permitted by this section results in a New York State modification decreasing New York adjusted gross income in the amount of $15,000 to A, and a modification increasing New York adjusted gross income in the amount of $10,000 to B.

The inequities with respect to both A and B are substantial in amount, in that each exceeds $1,000. With respect to A, the inequity amounts to $12,000 ($15,000 - $3,000 = $12,000). With respect to B, the inequity amounts to $12,000 ($10,000 + $2,000 = $12,000).

The inequity is substantial in relation to the amount of the New York fiduciary adjustment, because the inequity to A amounts to $12,000 which exceeds $3,750 which is 15 percent of the arithmetic total of all modifications (15% of $25,000 = $3,750). In this example, the inequity to B is similarly substantial in the amount and in relation to the amount of the New York fiduciary adjustment, but in order for the fiduciary to be entitled to elect the alternate method, a substantial inequity need only be present as to one party, i.e., the estate or trust or one of the beneficiaries.

Note:

The example in paragraph (a)(5) of this section also illustrates a situation where an inequity is considered substantial in amount and in relation to the New York fiduciary adjustment.

(d)Description of statement by fiduciary.

The schedule filed by the fiduciary as part of the New York State fiduciary return (form IT-205) must set forth the following information:

(1) a statement that the fiduciary is using an alternate method, prescribed in this section pursuant to subsection (d) of section 619 of the Tax Law, of determining to whom the items of New York State modification comprising the New York fiduciary adjustment must be attributed;

(2) the amount of each modification relating to an item of income, gain, loss or deduction of the estate or trust;

(3) the amount of the New York fiduciary adjustment determined pursuant to section 119.1 of this Part, and of the respective shares therein of the estate or trust and each of its beneficiaries determined pursuant to subdivision (a) or (b) of section 119.2 of this Part;

(4) the application of the method permitted under subsection (d) of section 619 of the Tax Law in accordance with the rules set forth in this section, and the respective shares of the estate or trust and each of its beneficiaries in the New York fiduciary adjustment determined under such method;

(5) a computation showing that the inequity is substantial both in amount and in relation to the amount of the fiduciary adjustment under the rules set forth in subdivision (c) of this section;

(6) the name and address of each beneficiary, if not otherwise set forth in the New York State fiduciary return (form IT-205), who is or would be required to report a share of one or more items of modification, or portion thereof, either pursuant to the method provided for in this section or as a component of the New York fiduciary adjustment allocated pursuant to subdivision (a) or (b) of section 119.2 of this Part;

(7) a statement that each beneficiary, whether or not otherwise identified in the New York State fiduciary return (form IT-205), was furnished with a copy of the schedule filed by the fiduciary pursuant to this section; and

(8) a statement setting forth the provision of the will or trust on which the fiduciary relies for authority for making a special allocation of one or more modifications under this section.

N.Y. Comp. Codes R. & Regs. Tit. 20 § 119.3