Table of Contents

Form 1041 (and Auxiliary Forms/Schedules)

Form 706 (United States Estate Tax Return)

The tax rates for 1997-99 are as follows:

The 1998 6-in-1 and Quik 1041 contain the 1999 rates. Thus, if you had a short-year estate or trust whose deadline precedes the availability of the 1999 forms, you can use the 1998 file to prepare the return. The words "1999 Return" are printed automatically at the top of Page 1.

Long-term capital gains treatment is now available for sales, exchanges and conversions of property held more than one year (instead of more than 18 months).

Such gains are eligible for the 10%, 20% or 25% maximum capital gains rates.

The 28% rate now applies only to the following:

The pre-1998 gains can be relevant to 1998 returns (which, by definition, have a starting date of 1/1/98 or later). This can occur where a fiscal-year partnership with a tax year ending in 1998 distributes to an estate or trust pre-1998 gains that are subject to the 28% rate. The estate or trust reports such gains on its own return for the year in which the tax year of the distributing entity (i.e., the partnership) ends.

In accordance with the instructions for Schedule D, Line 9, an estate or trust reports in column (f) of Line 9 the total capital gain distributions paid during the year, regardless of how long the estate or trust held its investment. This instruction has also appeared unchanged in Publication 550 (Investment Income and Expenses) at least as far back as 1986.

In column (g) of Line 9, the estate or trust reports the 28% rate gain portion of the total capital gain distributions. This portion presumably represents pre-1998 gains subject to the 28% rate, distributed to the estate or trust in 1998, and retaining their character as 28% rate gains in the hands of the estate or trust.

Note the difference in how dividends are reported in 1997 vs. 1998:

In 1997, for 1040 purposes, the amount from Box 1a (gross dividends) was reported on Schedule B, Line 5. Then, the capital gain distribution portion of Box 1a (the amount appearing in Box 1c) was reported on Schedule B, Line 7. This had the effect of reducing the Schedule B gross dividend income by the amount of the capital gain distribution, and transferring the capital gain distribution to Schedule D.

In 1998, for 1040 purposes, the amount from Box 1 includes only ordinary dividends, and does not include capital gain distributions. Accordingly, Schedule B, Line 5, calls only for ordinary dividends (Box 1). It no longer includes an offset line for transfer of capital gain distributions to Schedule D. Instead, such capital gain distributions (now contained in Box 2a) are reported directly on Schedule D of the 1040 without being passed through Schedule B.

Some third-party tax materials discuss "short-term capital gain distributions," and define them as the taxpayer’s share of a mutual fund’s short-term profits on its own sale of securities. They point out that such capital gain distributions may not be reported on Schedule D and thus may not be offset by capital losses from other investments.

In recent years 6-in-1 introduced a classification code for short-term capital gain distributions, sending them to Line 2 of the 1041 as if they were ordinary dividends (with no subsequent transfer to Schedule D).

The change to Form 1099-Div raises an interesting question of whether the IRS officially recognizes the existence of "short-term" capital gain distributions, and if so, whether it now treats them any differently.

With thanks to Morgan, Lewis & Bockius, we have reviewed Private Letter Rulings 9811036-98110037. These letter rulings conclude that short-term capital gain distributions (just like ordinary dividends) are includible in DNI, regardless of whether the trustee allocates them to principal or to income for accounting purposes. Thus, there appear to be only two relevant categories of income that matter here:

In conclusion, you can generally rely on the 1099-DIV for the treatment of a capital gain distribution as an "ordinary dividend" (Box 1) or a "capital gain distribution" (Box 2a).

Some mutual funds may separately report short-term capital gain distributions on their own customized 1099-DIV forms. In these cases, some practitioners take the position that these short-term capital gain distributions represent principal for accounting purposes, and for consistency should be reported as straight short-term capital gains (reported on the 1041 Schedule D, Line 1, with a zero basis). Our software gives you complete flexibility in classifying these transactions in the manner you deem most appropriate.

Schedule D of the 1041 requires an Acquisition Date and a Sale Date, so that a proper determination can be made of whether the capital gain/loss transaction qualifies as short term or long term.

The Schedule D form contains date columns that are not wide enough to display a four-digit year (when printed with a standard 12-pitch Prestige Elite font). The IRS is aware of this problem and may correct it in the future.

A 1041 filed for a calendar-year 1998 trust, or an estate whose fiscal year begins in 1998, will not have any transactions with an acquisition or sale date on/after January 1, 2000. An estate whose fiscal year starts in December 1998 must end its fiscal year on November 30, 1999, at the latest.

Nonetheless, we have programmed the 1998 1041 software so that it will assume the following for two-digit acquisition and sale dates on Schedule D:

The "0-12" window was selected because the U.S. income tax system was first implemented in 1913. Because there was no income tax system in the years 1900-1912, transactions in those years would have no income tax significance. It would be possible for an asset held by a trust since 1913 to bear an acquisition date of mm/dd/13 on Schedule D of the 1041. The sale of such an asset in any year between 2000 and 2012 would be properly recognized by the Quik 1041 as a long-term capital gain.

If you are using a version of 6-in-1 Version5/Gold other than Pennsylvania, you may occasionally find that descriptions for Schedule D, Line 6, are missing after you assemble. This problem can be cured with a simple change to one report in your Gold database. Please contact technical support if you need help resolving this matter.

If you purchase a bond with accrued interest, you can enter this interest as a negative receipt. When you later collect (and enter) the entire interest amount, the negative receipt will reduce the interest to its proper taxable level.

If you purchase the bond in one tax year but collect the interest in a different tax year, you may want to report the purchased interest (as a negative) and the collected interest in the same tax year.

The solution is simple. Simply change the "income tax date" (Screen 2 of Gold, Screen 5 of Lite) to 12/31 of the year in which you expect to collect the interest. 6-in-1 looks to the income tax date field when it assembles a 1041, and will correctly show the negative receipt as an offset at the bottom of the income entries for the particular asset group in the same tax year.

In accordance with the Taxpayer Relief Act of 1997 (the "1997 Act"), IRC 645 provides that the trustee of a qualified revocable trust and the grantor’s estate can elect to treat the trust as a part of the estate (instead of as a separate trust). This is effective for estates of decedents dying after August 5, 1997. Thus, trust income and expenses will be reported by the estate on the estate’s income tax return.

This election is irrevocable, and must be made on a timely filed first-year estate income tax return.

A sample election form is attached hereto as Exhibit "A."

This form is reprinted with the permission of Practitioners Publishing Company of Fort Worth, TX, publishers of the 1041 Deskbook for 1998. We are working out an arrangement with this company to make available to our customers, at a discounted price, copies of its 1041 Deskbook and its 706/709 Deskbook. Both of these are outstanding publications authored by some of the leading experts in the country. You will hear more about this arrangement in the near future.

The 1997 Act extended the "65-day rule" under Section 663(b) to estates with tax years beginning after August 5, 1997. Prior to this change, the 65-day rule was limited to trusts.

Under this rule, an estate or a trust may treat distributions made within 65 days after the close if its tax year as if they were made on the last day of the tax year. For tax years ending on December 31, 1998, the last date for such an election is March 6, 1999. The election is made by marking Checkbox #6 on the 1041, Page 2, Other Information, on a return filed by the due date (including extensions).

Line 20 "Reserved" eliminated.

Lines 21-30. Renumbered to 20-29.

Schedule G, Line 1b. Changed from "Other taxes" to "Taxes on lump-sum distributions." Prior to 1998, Line 1b was used to report the Tax on Lump-Sum Distributions (Form 4972) and/or the Section 644 Tax on trusts.

The 1997 Act repealed IRC Section 644 for sales or exchanges of certain property by a trust on or after August 6, 1997. Thus, Line 1b is now used exclusively for the Tax on Lump-Sum Distributions.

Part I, Line 11 "Reserved" eliminated.

Lines 12-28. Renumbered to 11-27.

Part III, Line 40 "Section 644 tax included in Schedule G, line 1b" eliminated.

Part III, Line 41 "Add lines 39 and 40" eliminated.

Lines 42-64. Renumbered to 39-61.

Part I, Line 4. Reference to "Short-term capital loss carryover from 1996 Schedule D, Line 28" changed to reference to "line 9 of the 1997 Capital Loss Carryover Worksheet."

Part II, Line 11. Reference to "Long-term capital loss carryover…from 1996 Schedule D, Line 35" changed to reference to "line 14 of the 1997 Capital Loss Carryover Worksheet."

Part II, references to May 7, 1997, July 28, 1997, and 18 months eliminated.

Part V, Line 25 "Reserved" eliminated.

Lines 26-54. Renumbered to 25-53.

No significant changes.

Page 1, Block B. The "principal business code" (previously based on the Standard Industrial Classification (SIC) system) has been replaced with a code based on the North American Industry Classification System (NAICS).

No significant changes.

Page 1, Block B. The "principal agricultural activity code" (previously based on the Standard Industrial Classification (SIC) system) has been replaced with a code based on the North American Industry Classification System (NAICS).

Effective for tax years beginning after August 5, 1997, the throwback rules for domestic trusts were repealed. Schedule J, however, is still relevant to (1) trusts created before March 1, 1984, that would be treated as multiple trusts under IRC 643(f), (2) foreign trusts, and (3) domestic trusts that were once treated as foreign trusts.

The form itself had no significant changes.

No significant changes.

Page 1, Part II, Line 6 "Additional child tax credit" added.

Page 1, Lines 5-20. Renumbered to 6-21.

Page 1, Line 12. $500 changed to $1,000. If the tax owed (after subtracting withholding and other credits) is less than $1,000, the taxpayer does not owe a penalty.

Page 1, Line 13. The test for avoiding the penalty based on the prior year’s tax (from the 1997 return) is now reduced to a single, 100% test. The use of 110% of the prior year’s tax (for taxpayers with an adjusted gross income over the 150,000 or 75,000 threshhold) was eliminated.

Page 1, Line 19. Multiple changed from .05986 to .05043. This multiple computes the maximum estimated tax penalty using the short method. It is a function of the number of days in each period and the underpayment rate applicable to that period.

In a year where only a single rate applies for the entire year (as in 1997), this multiple consists of the sum of:

In 1998, there were two rate periods (04/16/98 – 12/31/98 at 8%, and 01/01/99 – 04/15/99 at 7%). Thus, computation of the multiple must be done for the due dates through 12/31/98 at 8%, and 01/01/99 through 04/15/99 at 7%.

Page 1, Line 20. Multiple changed from .00025 (9%/365) to .00019 (7%/365). This represents the daily rate for the underpayment penalty rate in effect between 01/01/99 through 04/15/99 (7%).

Page 2, Part IV, Section B. The rate periods are expanded from one period (for the entire year from 04/16/97 – 04/15/98) to two periods (04/16/98 – 12/31/98 at 8%, and 01/01/99 – 04/15/99 at 7%).

Page 1, Line 14b. The estimated tax safe harbor (based on the prior year’s tax) is increased to 105% of that amount if (a) the AGI on the prior return is more than $150,000 and (b) less than 2/3 of gross income for 1998 or 1999 is from farming or fishing.

Vouchers. The payee for the check or money order was changed from "Internal Revenue Service" to "United States Treasury."

Line 1. The check boxes for the 20 different forms were rearranged into four columns of five choices each.

Line 1. Choices for Form 1041-QFT and Form 1065-B were added.

The Signature and Verification block was removed. Thus, this form no longer requires a signature (probably because the extension being requested is "automatic").

In the Taxpayer Relief Act of 1997 (the "1997 Act"), Congress revised Section 2010, which is still titled "Unified Credit Against Estate Tax" It now expresses the "unified credit" in terms of the "applicable exclusion amount" according to the following table:

The "unified credit" is now referred to as the "applicable credit amount." This is the amount of credit that protects the above "applicable exclusion amount" from estate or gift taxes.

Before the 1997 Act, Section 2001(c) (2) read as follows:

After the 1997 Act, Section 2001(c) (2) now reads as follows:

The intent in both versions of the provision was to add a 5% estate tax surcharge on enough of the taxable estate exceeding $10,000,000 until the overall tax equaled exactly 55% of the taxable estate. Taxing all of the taxable estate at 55% means that the benefits of both (a) the lower rates (53% through 18%) in the lower brackets ($10,000,000 and below) and (b) the applicable exclusion amount ($600,000 in 1987-1997) would completely disappear.

This is how the law worked in 1997 and before. The point at which the entire taxable estate becomes taxable at 55% was $21,040,000. Thus, at that point, the 5% estate tax surcharge stopped, and each additional dollar of taxable estate was taxed at a flat rate of 55%.

The drafters of the 1997 Act, however, made a mistake in the new version of Section 2001(c) (2). They changed the hard cap of $21,040,000 (which reflected the phaseout of both benefits), and replaced it with a cap that reflected only the benefit of the graduated rates. This new cap works out to $17,184,000 for years 1998 through 2006.

For the mathematicians among you, here is the proof of how the two caps are computed. It involves solving for C (the "Cap") in the following formulas:

Solving for C yields $21,040,000.

Solving for C yields $17,184,000

When Congress realized this error, a technical correction was proposed to reinstate the phaseout of the unified credit. This correction would have resulted in a top bracket ranging from $21,225,000 (1998) to $24,100,000 (2006). This correction did not make it, however, into the IRS Restructuring and Reform Act of 1998, signed by President Clinton on July 22, 1998 (the "1998 Act").

Since 1991, our 706 software has contained a powerful feature for computing the optimal marital deduction. This is the optimal amount that can be claimed as a marital deduction, in order to leave enough of a taxable estate to be fully absorbed by the applicable exclusion amount ($600,000 in 1987-1997) and the state death tax credit ($42,424.24 in 1987-1997). The software utilizes a fully algebraic solution that computes this amount in a split second.

The following table displays the Applicable Exclusion Amounts and the Applicable Credit Amounts for the Federal Tax, the State Death Tax Credit, and a combination of the two. Note the familiar $642,424.24 amount appearing on the 1997 line in the Combined column in the Applicable Exclusion Amount section.

The 706 previously shipped to you will compute an accurate optimal marital deduction for 1998 up through taxable estates of $17,184,000. Above that amount, it will understate the optimal marital deduction (and therefore overstate the taxable estate). It will also not take into account the impact of any QFOBI deduction that you may be claiming (see below).

Because of the gradual increase in the Applicable Exclusion Amount from $600,000 to $1,000,000 through 2006, we have recently modified the optimal marital solution. It now takes into account the crossing of brackets (federal 37% to 39% to 41%, and state death tax credit 4.0% to 4.8% to 5.6%), and the reduction in the top of the 5% surcharge bracket from $21,040,000 to $17,184,000. It also incorporates the QFOBI deduction (computed on Schedule T) in the calculation.

If you need to calculate an optimal marital deduction for a 1998 or 1999 taxable estate in the $17,184,000+ range, or one that involves a QFOBI deduction, please contact us and we will immediately send the updated software to you by e-mail.

We plan to include these features in our next 706 shipment.

The 1997 Act introduced an exclusion for "qualified family-owned business interests" ("QFOBI") (Section 2033A). The 1998 Act changed the QFOBI exclusion to a deduction and moved it from Section 2033A to Section 2057. Starting in 1998, the Section 2057 QFOBI deduction, together with the Section 2010 Applicable Exclusion Amount, shields as much as $1,300,000 of "qualified family-owned business interests" from estate tax.

The limit on the QFOBI deduction is $675,000. Thus, when the combination of a QFOBI and the Applicable Exclusion Amount exceeds $1,300,000, the Applicable Exclusion Amount must be reduced. This amount is equal to $1,300,000 minus the QFOBI deduction (but not to exceed the Applicable Exclusion Amount available for that year).

In past years, the IRS has preprinted the Unified Credit Amount (now called the "Applicable Credit Amount") on Page 1 of the 706. The IRS is still working on the 1999 version of the 706. As of mid-February, it had not yet decided whether to continue preprinting the Applicable Credit Amount on the form, or leave it open for the practitioner to enter. Note that, even though the new law uses the term "Applicable Credit Amount," the 1998 Form 706 still uses the term "Unified Credit."

Our 706 software has always removed this number from the form itself, and printed the appropriate amount with the data that is sent to the form.

Because an estate might not elect (or even be eligible for) the entire $675,000 QFOBI deduction, it is possible that the Applicable Exclusion Amount will not be obtainable from the table in Section 2010. If you are interested in having us help you compute the appropriate amount for a particular estate, please contact us and we will be happy help to you. We view this as a natural extension of the circular calculation service that we have provided to many of our customers since 1986.

The 1997 Act introduced provisions for adjusting various amounts in connection with various tax computations. These adjustments are based on the increase in the Consumer Price Index from year to year. Indexing of the annual gift tax exclusion is rounded to the next lowest multiple of $1,000, and indexing of the other amounts is rounded to the next lowest multiple of $10,000.

In accordance with Rev. Proc. 98-61, 1998-52 I.R.B., the following amounts apply for the years indicated: