§40-18-25. Estates and trusts.

(a) For purposes of this chapter, the income and deductions, including the distribution deduction, of estates and trusts shall be determined in accordance with Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code, 26 U.S.C. §641 et seq., relating to estates, trusts, beneficiaries, and decedents, except as otherwise provided in this section.

(1) The income and deductions shall be increased by any items that are includable or deductible by an individual in computing Alabama income tax but are not includable or not deductible by an individual in computing federal income tax.

(2) The income and deductions shall be decreased by any items that are not includable or not deductible by an individual in computing Alabama income tax but are includable or deductible by an individual in computing federal income tax.

(b) For purposes of this chapter, the income and deductions of beneficiaries of estates and trusts, and persons who are treated as owners of any portion of a trust, shall be determined in accordance with Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code, U.S.C. §641 et seq., relating to estates, trusts, beneficiaries, and decedents, except as otherwise provided in this section.

(1) There shall be included in the income of the beneficiary of an estate or trust to whom an amount is paid or deemed to have been paid that beneficiary's share of the taxable income that is allowed to the estate or trust as a distribution deduction under subsection (a) of this section.

(2) The character of any item of income, gain, loss, deduction, or credit included in a beneficiary's income pursuant to subdivision (1) shall be determined as if such item were realized directly from the source from which realized by, or incurred in the same manner as incurred by, the estate or trust.

(3) In the case of a nonresident beneficiary, income derived through an estate or trust is taxable by this state only to the extent it is derived from property owned or business transacted in this state and as determined in accordance with this section.

(4) The provisions of 26 U.S.C. §642(h) shall not apply.

(c)(1) If a resident estate or resident trust receives income from the conduct of a trade or business in Alabama and in one or more other states or territories, such estate or trust shall be allowed a credit for the amount of income tax actually paid by such estate or trust (or by a fiduciary or beneficiary of such estate or trust to the extent that the amount is attributable to the estate or trust) to such states or territories.

(2) In case the amount of tax actually paid by a resident estate or resident trust to another state or territory is in excess of the amount that would be due on the same income computed on the income tax rate in Alabama, then only such amount as would be due in Alabama on such taxable income shall be allowed as a credit pursuant to subdivision (1).

(d) The tax on an electing small business trust, for which an election under 26 U.S.C. §1361(e) is in effect, and on the beneficiaries of such trust shall be determined as follows:

(1) The portion of the trust that consists of stock in one or more Alabama S corporations, as defined in Section 40-18-160, shall be treated as a separate trust. The net income of the separate trust shall be computed including only the items taken into account under Section 40-18-162, gain or loss from the disposition of stock of an Alabama S corporation, and federal income taxes and administrative expenses allocable to the income items treated under this subdivision. The net income shall be taxed at the rate of five percent. The separate trust shall not be allowed any personal exemption.

(2) No item of income or loss shall be apportioned to any beneficiary of the trust from the separate trust described in subdivision (1).

(3) The income taxation of the remainder of the trust that does not own the stock of any Alabama S corporation and its beneficiaries shall be determined under subsections (a) and (b) without regard to the income, gain, deductions, loss, or credits of the separate trust owning stock in one or more Alabama S corporations.

(e) In the case of a qualified subchapter S trust, as defined in 26 U.S.C. §1361(d), all the items of income, deduction, and credit of the portion of the trust consisting of the stock in an Alabama S corporation shall not be subject to tax under this section but shall be included in computing the net income of the beneficiary of such trust.

(f) Notwithstanding subsections (a) and (b), no deduction otherwise allowable under 26 U.S.C. §691(c)(1)(A) shall be allowed to a person who includes an amount in gross income under 26 U.S.C. § 691(a).

(g) Except as may be provided for by the Department of Revenue regulations, any trust described in 26 U.S.C. §671 shall be subject to the filing and reporting requirements of Section 40-18-29. Notwithstanding such filing and reporting requirements, the grantor of such trust, or other person treated as the owner of such trust, shall take into account the income, deductions, and credits of such trust as provided in 26 U.S.C.

(h) For the purpose of determining any income tax due by any nonresident beneficiary of any trust or estate, the income from intangible personal property shall not be construed to arise from sources within the state merely because the title and ownership of such intangible personal property is vested in a resident fiduciary, resident trust, or resident estate or the evidence of ownership thereof is located within the state.

(i) For purposes of the taxation of the income (or the net income) of a business trust under this title, a business trust shall be classified for tax purposes in the same manner as it is classified for federal income tax purposes.

(j) A person who is treated as the owner of any portion of a trust pursuant to 26 U.S.C. §671-679, relating to grantor trusts, may deduct, in computing adjusted gross income under this chapter, the administrative and other expenses of the portion of the trust treated as owned by that person.

(Acts 1935, No. 194, p. 256; Acts 1939, No. 558, p. 880; Code 1940, T. 51, §392; Acts 1945, No. 316, p. 507; Acts 1982, No. 82-465, p. 759, §5; Acts 1982, 1st Ex. Sess., No. 82-667, p. 85, §5; Acts 1985, No. 85-515, §§11-12; Acts 1997, No. 97-625, p. 1048, §3; Act 98-299, p. 487, §1; Act 98-502, p. 1083, §1; Act 2006-114, p. 173, §2.)