The federal Tax Reform Act of 1986 ("TRA") required that all trusts (except trusts exempt from taxation under I.R.C. § 501(a) or a trust described in I.R.C. § 4947(a)(1)) adopt a calendar year for federal tax purposes. TRA § 1403; I.R.C. § 645 (1986). As a result of the federal change in taxable year, most trusts that previously filed on a fiscal year basis for Massachusetts tax purposes will change to calendar year filing. The procedure for the Massachusetts change in taxable year is described in Department of Revenue T.I.R. 87-8.
The purpose of this Technical Information Release is to describe the procedure which fiduciaries and beneficiaries of any trust required to change its taxable year by TRA § 1403 should follow to file a beneficiary's No-Tax Status Exemption, Form 20, or to file a beneficiary's Claim for Exemptions Applicable to Fiduciary Income, Form 20A, for the trust's short taxable year ending December 31, 1987. This T.I.R. applies only to a trust that is required to change to a calendar year by I.R.C. § 645 and that files and pays Massachusetts income tax under G.L. c. 62, § 10(a)-(d). This T.I.R. does not apply to corporate trusts taxed under G.L. c. 62, § 8, or to trusts that do not file and pay Massachusetts income taxes.
HOW TO FILE A NO-TAX STATUS EXEMPTION OR A CLAIM FOR EXEMPTIONS APPLICABLE TO FIDUCIARY INCOME
Massachusetts generally imposes tax on trust income at the trust level. See G.L. c. 62, §§ 8, 10. But see G.L. c. 62, §§ 10(e), 11, 11A, 17A; 830 CMR 62.17A.1(3) (Massachusetts pass-through tax treatment of grantor trusts, nonresident trusts, pooled income funds, charitable remainder annuity trusts, unitrusts, and corporate trusts which are also S corporations). In Massachusetts, the rate of tax imposed on trust income is the same as the rate for individuals. See G.L. c.62, §§ 4, 10.
Trust income, with the exception of corporate trust income, See G.L. c. 62, §§ 3(A),(B), 8(a), is taxable to the same extent as if the beneficiaries had received the income directly. See G.L. c. 62, § 10(a),(b). At the request of any beneficiary, a trustee may claim on behalf of the beneficiary a no-tax status exemption. G.L. c. 62, § 5(a). The trustee must file a Form 20, Beneficiary's Claim of No Tax Status Exemption, as completed by the beneficiary. See G.L. c. 62, § 12. At the request of any beneficiary, a trustee may also claim on behalf of the beneficiary any personal exemptions to which the beneficiary is entitled under G.L. c. 62, § 3(B)(b), and which the beneficiary did not use on the beneficiary's Form 1 or Form 1-NR. The trustee must file a Form 20A, Beneficiary's Claim for Exemptions Applicable to Fiduciary Income, as completed by the beneficiary. See G.L. c. 62, § 12A.
A fiscal year trust should have claimed the exemptions on behalf of the beneficiaries on the basis of the beneficiaries' calendar year which ended during the trust's fiscal year. As described in T.I.R. 87-8, TRA § 1403 required most fiscal year trusts to change to calendar year filing. A fiscal year trust should have filed any applicable Form 20 or Form 20A for a beneficiary's taxable year ending December 31, 1986, with the trust's return for its fiscal year which ended after December 31, 1986.
A trust filing a return for its short taxable year ending December 31, 1987, may file any applicable Form 20 or Form 20A for the beneficiary's taxable year ending December 31, 1987. No proration for the short taxable year of the exemptions is required. After December 31, 1987, the trust and the beneficiaries should have the same taxable year.
The following example illustrates how this procedure will operate:
Trust A was a fiscal year taxpayer, with a year end of May 31. Trust A filed its return for the fiscal year ending May 31, 1987, and included a Form 20 for its beneficiary, Babbit, and a Form 20A for its other beneficiary, Carson. Babbit and Carson are both calendar year taxpayers. The two Forms were completed based on the information in Babbit and Carson's returns completed for the calendar year ending December 31, 1986.
Trust A should file a short taxable year return for the period June 1, 1987, through December 31, 1987. Trust A may claim exemptions on behalf of Babbit and Carson for their taxable year ending December 31, 1987. No proration of the exemptions is required.
Stephen W. Kidder
Commissioner of Revenue
April 5, 1988