The Raja Trust operates a welding business. Its current-year cost recovery deductions properly amount to $75,000. Raja’s accounting income was $100,000 of which $40,000 was distributed to first-tier beneficiary Chuck, $25,000 was distributed to second-tier beneficiary Ruby, and $35,000 was accumulated by the trustee. Ruby also received a $25,000 discretionary corpus distribution. Raja’s DNI was $80,000. Identify the treatment of Raja’s cost recovery deductions.
What will be an ideal response?
The Raja Trust's cost recovery deductions follow the disposition of its current-year accounting income (not DNI or total distributions). Thus, Chuck can deduct $30,000 in this regard [$75,000 × ($40,000 ÷ $100,000)]. Similarly, Ruby can deduct $18,750 [$75,000 × ($25,000 ÷ $100,000)], and Raja Trust can deduct $26,250 [$75,000 × ($35,000 ÷ $100,000)]. Irrelevant to this computation are (1) the first-tier or second-tier status of the beneficiaries' distributions, (2) Ruby's corpus distribution, and (3) the trust's allocation of cost recovery to income or to corpus.
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