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Subchapter J — Throwback Rules (Portfolio 856)

Product Code: TPOR42
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Subchapter J — Throwback Rules, written by Daniel C. Knickerbocker, Jr., Esq., New York Law School, describes and analyzes the provisions of §§665-668 of the Internal Revenue Code, dealing with the income tax treatment of “accumulation distributions” (i.e., distributions that exceed current income) from certain trusts to their beneficiaries.

These provisions are known as the “throwback rules.” Under the throwback rules, a beneficiary receiving an accumulation distribution is taxed as if the trust had made the distribution in the year it accumulated the income. These rules were formerly applicable to all trusts, but since 1997 have applied primarily to foreign trusts.

This Portfolio

  • Covers legislative solutions, those enacted before 1954, then the Internal Revenue Code of 1954 and subsequent Tax Reform Acts of 1969, 1976, and 1986, as well as the Taxpayer Relief Act of 1997.
  • Provides an overview of special rules and problems and discusses the calculation of accumulation distribution including distribution of accounting income in excess of distributable net income and distributions in excess of accounting income
  • Discusses the Beneficiary's Tax Calculation, reductions in allocated amounts, minority accumulations and tax-exempt interest
  • Examines foreign trusts and related governing principles along with a definition and overview of basic tax rules, then delves into the topic of foreign trust throwbacks
  • Illustrates special cases such as the beneficiary's taxable income being the same in two or more base years, the Alternative Minimum Tax, adjustments for estate and generation-skipping transfer taxes and the “Kiddie Tax.”

The text sets forth numerous examples of the calculations required by throwback. These are based on assumptions set forth in the Worksheets.

 Subchapter J — Throwback Rules allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
  • Invaluable practice documents including tables, charts and lists
  • Plain-English guidance from world-class experts
  • Real-world and in-depth analysis that lets you explore various options
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
  • Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.

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Detailed Analysis

I. Introduction

A. Background: The Trust's Potential for Tax Avoidance

B. Legislative Solutions

1. Before 1954

2. Internal Revenue Code of 1954

3. Tax Reform Act of 1969

4. Tax Reform Act of 1976

5. Tax Reform Act of 1986

6. Small Business Job Protection Act of 1996

7. Taxpayer Relief Act of 1997

II. The Throwback Structure

A. General Principles of Trust and Beneficiary Taxation

B. When Throwback Occurs

1. Scope

2. Prerequisites

a. Accumulation Distribution

b. Undistributed Net Income

(1) Preceding Taxable Year

(2) Taxes Imposed on the Trust

C. Allocation

D. Taxes Deemed Distributed

1. In General

2. Credits Against Tax

a. Domestic Trusts

b. Foreign Trusts

E. Tax on the Beneficiary

III. Special Rules and Problems

A. Calculating the Accumulation Distribution

1. Distribution of Accounting Income in Excess of Distributable Net Income

2. Distributions in Excess of Accounting Income

3. Exercise of Power

4. Gifts, Bequests, and Charitable Distributions

5. Minority Accumulations

6. Distribution from One Trust to Another

7. Separate Share Rule

8. 65-Day Rule

9. Distributions in Kind

10. Estates

11. Exclusions from DNI

a. Section 644 Gains

b. Electing Small Business Trusts

12. Overpayments of Estimated Taxes

B. Allocation of Accumulation Distributions

1. In General

2. Undistributed Net Income

a. Items of Ordinary Income Allocated to Corpus

(1) Non-Capital Gains

(2) Imputed Income

b. Nondeductible Charges Against Income

(1) Miscellaneous Itemized Deductions

(2) Excess Investment and Personal Interest

(3) Suspended Deductions

3. Years That Are Not Preceding Taxable Years

a. 1969 Transition

b. Simple Trusts

(1) “Outside Income”

(2) Trustee's Failure to Distribute All Income Required To Be Distributed Currently

4. Allocation When Records Are Inadequate

5. Where Accumulation Distribution Includes Amounts Distributed by Another Trust

6. Apportionment of Deemed Distributions Among Several Beneficiaries

a. In General

b. Where Separate Share Rule Applies

C. The Beneficiary's Tax Calculation

1. Reductions in Allocated Amounts

a. Minority Accumulations

b. Tax-Exempt Interest

2. Addition of Allocated Amounts to Taxable Income

a. What Is the Taxable Income to Which Throwbacks Are Added?

(1) Audit Adjustments

(2) Items Dependent Upon the Amount of Gross, Adjusted Gross, or Taxable Income

(3) Effect of Other Accumulation Distributions

(4) Income Averaging

(5) Taxpayer Not in Existence in Preceding Taxable Year

b. Elimination of Character Rules

c. Taxes Deemed Distributed

(1) In General

(2) Exclusion of Alternative Minimum Tax

(3) Multiple Trust Rule

(4) Exception to the Minority Exception

(5) Determining Which Are “Third” Trusts

3. Certain Years Not Taken into Account

4. Special Cases

a. Beneficiary's Taxable Income the Same in Two or More Base Years

b. Alternative Minimum Tax

c. Adjustments for Estate and Generation-Skipping Transfer Taxes

d. “Kiddie Tax”

e. Electing Small Business Trusts

5. Interest

IV. The Former § 644 Tax

V. Foreign Trusts

A. Governing Principles

1. Definition and Basic Tax Rules

2. Foreign Trust Throwbacks

a. In General

b. Default Calculation

c. Calculation of Interest Charge

B. Forestalling Tax Avoidance

1. Distributions Through Nominees

2. Loans

VI. Comment, Caveat, Critique

A. Planning and Execution

B. Interpretation

C. Appraisal

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Working Papers

Table of Worksheets

Worksheet 1 Form 1041, Schedule J, Accumulation Distribution for a Complex Trust

Worksheet 2 Form 4970, Tax on Accumulation Distribution of Trusts

Worksheet 3 Assumptions and Filled-In Form 4970 for Examples in Detailed Analysis

Worksheet 4 House Ways and Means Committee Report on the Accumulation Trust Provisions of the Tax Reform Act of 1976 (H.R. 10612) [H.R. Rep. No. 658, 94th Cong., 1st Sess. 183–87 (1975)]

Worksheet 5 Senate Finance Committee Report on the Accumulation Trust Provisions of the Tax Reform Act of 1976 (H.R. 10612) [Sen. Rep. No. 938, 94th Cong., 2d Sess. 169–175 (1976)]

Worksheet 6 Conference Committee Report on the Accumulation Trust Provisions of the Tax Reform Act of 1976 (H.R. 10612) [H.R. Rep. No. 1515, 94th Cong., 2d Sess. 441–42 (1976)]

Worksheet 7 Staff of Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976 [Explanation of Accumulation Trust Provisions, 159–64 (1976)]

Worksheet 8 House Ways and Means Committee Report on the Trust Provisions of the Tax Reform Act of 1984 (H.R. 4170) [H.R. Rep. No. 432 (Part 2), 98th Cong., 2d Sess. 1237-40 (1984)]

Worksheet 9 Senate Finance Committee Report on the Trust Provisions of the Tax Reform Act of 1984 (H.R. 4170) [S. Prt. No. 169 (Vol. I), 98th Cong., 2d Sess. 245-48 (1984)]

Worksheet 10 Staff of Joint Committee on Taxation General Explanation of the Revenue Provisions of the Tax Reform Act of 1984 [Explanation of Trust Provisions 253–57 (1984)]

Worksheet 11 Conference Committee Report on the Small Business Job Protection Act of 1996 (H.R. 3448) [H.R. Rep. No. 737, 104th Cong., 2d Sess. 218-220 & 330-338 (1996)]

Worksheet 12 Conference Committee Report on the Taxpayer Relief Act of 1997 (H.R. 2014) [H.R. Rep. No. 220, 105th Cong., 1st Sess. 408-410 (1997)]

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

Treatises:

Tax Management Portfolios:

Periodicals:

1976

1977

1984

1985

1986

1987

1990

1992

1993

1995

1997

1998

1999

2000

2001

2002

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Daniel C. Knickerbocker
Daniel C. Knickerbocker, Jr., (Deceased), A.B., Syracuse University (1940); J.D., Cornell University (1950); Advanced Management Program, Harvard University Graduate School of Business Administration (1969). Member of the New York and Massachusetts Bars. Member, American Bar Association; Association of the Bar of the City of New York; American Law Institute; Association of Life Insurance Counsel; Society of American Law Teachers.