Trusts, Taxes and Business: Dealing with 'Check-the-Box' Regulations

Abstract:     
Is that trust an ordinary trust or a business trust? The tax man says it makes a difference.

Business lawyers commonly assume that trusts formed for their clients will be taxed as ordinary trusts under federal income tax rules. This generally means trust income is taxed to the beneficiaries when trust income is actually distributed. When trust income is accumulated for later distribution, it is temporarily taxed to the trust itself and then later to beneficiaries who receive distributions and a form of tax credit for the tax paid earlier by the trust.

These trust taxation norms do not apply when a trust is considered a business trust and is therefore taxed like other similar business entities. The applicable legal standard distinguishing an ordinary trust from a business trust has remained relatively static (albeit vague) since the ancient origins of our federal tax system. However, the consequence of business trust status was radically altered in 1997. In that year, the blockbuster check-the-box federal tax regulations mercifully mitigated the stakes of a trust being considered a business trust (the regulations were so designated because they allowed lawyers to choose tax classification simply by in effect checking the box relating to the most desired tax classification. See Treas. Reg. 301.7701-1 to -4).

Number of Pages in PDF File: 6

Keywords: trust, tax classification, business entity, ordinary trust, business trust, subchapter J

JEL Classification: K10, K19, K30, K34

Accepted Paper Series