The Drabb Trust owns a plot of business-related land, basis of $50,000, fair market value of $35,000. Drabb is subject to a 35% marginal income tax rate. Its sole beneficiary, Eddie, is subject to a 12% marginal income tax rate. Drabb's current-year distributable net income is $95,000. What is the most preferable action for the trustee of Drabb to take, considering only the related tax consequences?

Question

Quizplus · Accepted Answer

Selling the land to a third party would realize a loss in the amount of the difference between the basis and the fair market value, which Drabb can use to offset its current-year taxable income, resulting in tax savings. Additionally, if the land is distributed to Eddie, he would incur a capital gain tax on the difference between the fair market value at the time of distribution and his own basis, and the trust would also lose the ability to use the loss to offset taxable income. The § 643(e) election would simply allow the trust to allocate the capital gain arising from the sale of the land to Eddie as the beneficiary, but this would not be beneficial in this scenario since there is no capital gain to allocate. Therefore, selling the land to a third party would result in the most tax savings for both the trust and its beneficiary.

The Drabb Trust Owns a Plot of Business-Related Land, Basis