26 C.F.R. § 1.662(c)-4 Illustration of the provisions of sections 661 and 662.
Title 26 - Internal Revenue
Title 26: Internal Revenue
PART 1—INCOME TAXES
estates and trusts which may accumulate income or which distribute corpus
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§ 1.662(c)-4 Illustration of the provisions of sections 661 and 662.
The provisions of sections 661 and 662 may be illustrated in general by the following example:
Example. (a) Under the terms of a testamentary trust one-half of the trust income is to be distributed currently to W, the decedent's wife, for her life. The remaining trust income may, in the trustee's discretion, either be paid to D, the grantor's daughter, paid to designated charities, or accumulated. The trust is to terminate at the death of W and the principal will then be payable to D. No provision is made in the trust instrument with respect to depreciation of rental property. Capital gains are allocable to the principal account under the applicable local law. The trust and both beneficiaries file returns on the calendar year basis. The records of the fiduciary show the following items of income and deduction for the taxable year 1955:
Rents........................................................ $50,000Dividends of domestic corporations................ 50,000Tax-exempt interest............................... 20,000Partially tax-exempt interest..................... 10,000Capital gains (long term)......................... 20,000Depreciation of rental property................... 10,000Expenses attributable to rental income............ 15,400Trustee's commissions allocable to income account. 2,800Trustee's commissions allocable to principal 1,100 account..........................................
| (b) The income for trust accounting purposes is $111,800, and the trustee distributes one-half ($55,900) to W and in his discretion makes a contribution of one-quarter ($27,950) to charity X and distributes the remaining one-quarter ($27,950) to D. The total of the distributions to beneficiaries is $83,850, consisting of (1) income required to be distributed currently to W of $55,900 and (2) other amounts properly paid or credited to D of $27,950. The income for trust accounting purposes of $111,800 is determined as follows:
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Rents........................................................ $50,000Dividends......................................... 50,000Tax-exempt interest............................... 20,000Partially tax-exempt interest..................... 10,000 ------------ Total......................................... 130,000Less: Rental expenses................................. $15,400 Trustee's commissions allocable to income 2,800 account........................................ ____ 18,200 ---------- Income as computed under section 643(b)....... 111,800
| (c) The distributable net income of the trust as computed under section 643(a) is $82,750, determined as follows:
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------------------------------------------------------------------------Rents............................ ........... ........... $50,000Dividends........................ ........... ........... 50,000Partially tax-exempt interest.... ........... ........... 10,000Tax-exempt interest.............. ........... $20,000Less: Trustee's commissions allocable $600 thereto (20,000/130,000 of $3,900)....................... Charitable contributions 4,300 allocable thereto (20,000/ 130,000 of $27,950)........... -------------- _____ 4,900 _____ 15,100 ------------ Total........................ ........... ........... 125,100Deductions: Rental expenses................ ........... 15,400 Trustee's commissions ($3,900 ........... 3,300 less $600 allocated to tax- exempt interest).............. Charitable deduction ($27,950 ........... 23,650 less $4,300 attributable to tax-exempt interest).......... _____ 42,350 ------------ Distributable net income..... ........... ........... 82,750------------------------------------------------------------------------
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In computing the distributable net income of $82,750, the taxable income of the trust was computed with the following modifications: No deductions were allowed for distributions to beneficiaries and for personal exemption of the trust (section 643(a) (1) and (2)); capital gains were excluded and no deduction under section 1202 (relating to the 50 percent deduction for long-term capital gains) was taken into account (section 643(a)(3)); and the tax-exempt interest (as adjusted for expenses and charitable contributions) and the dividend exclusion of $50 were included (section 643(a) (5) and (7)). (d) Inasmuch as the distributable net income of $82,750 as determined under section 643(a) is less than the sum of the amounts distributed to W and D of $83,850, the deduction allowable to the trust under section 661(a) is such distributable net income as modified under section 661(c) to exclude therefrom the items of income not included in the gross income of the trust, as follows:
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Distributable net income..................................... $82,750Less: Tax-exempt interest (as adjusted for expenses $15,100 and the charitable contributions).............. Dividend exclusion allowable under section 116.. 50 ____ 15,150 ---------- Deduction allowable under section 661(a)................. 67,600
| (e) For the purpose of determining the character of the amounts deductible under section 642(c) and section 661(a), the trustee elected to offset the trustee's commissions (other than the portion required to be allocated to tax-exempt interest) against the rental income. The following table shows the determination of the character of the amounts deemed distributed to beneficiaries and contributed to charity.
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---------------------------------------------------------------------------------------------------------------- Partially Rents Taxable Excluded Tax exempt tax exempt Total dividends dividends interest interest----------------------------------------------------------------------------------------------------------------Trust income............................ $50,000 $49,950 $50 $20,000 $10,000 $130,000Less: Charitable contribution............... 10,750 10,750 .......... 4,300 2,150 27,950 Rental expenses....................... 15,400 .......... .......... .......... .......... 15,400 Trustee's commissions................. 3,300 .......... .......... 600 .......... 3,900 ----------------------------------------------------------------------- Total deductions.................... 29,450 10,750 0 4,900 2,150 47,250 -----------------------------------------------------------------------Amounts distributable to beneficiaries.. 20,550 39,200 50 15,100 7,850 82,750----------------------------------------------------------------------------------------------------------------
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The character of the charitable contribution is determined by multiplying the total charitable contribution ($27,950) by a fraction consisting of each item of trust income, respectively, over the total trust income, except that no part of the dividends excluded from gross income are deemed included in the charitable contribution. For example, the charitable contribution is deemed to consist of rents of $10,750 (50,000/130,000× $27,950). (f) The taxable income of the trust is $9,900 determined as follows:
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Rental income................................................ $50,000Dividends ($50,000 less $50 exclusion)............ 49,950Partially tax-exempt interest..................... 10,000Capital gains..................................... 20,000 ------------ Gross income.................................. 129,950Deductions: Rental expenses................................. 15,400 Trustee's commissions........................... 3,300 Charitable contributions........................ 23,650 Capital gain deduction.......................... 10,000 Distributions to beneficiaries.................. 67,600 Personal exemption.............................. 100 ------------ ......... 120,050 ---------- Taxable income........................................... 9,900
| (g) In computing the amount includible in W's gross income under section 662(a)(1), the $55,900 distribution to her is deemed to be composed of the following proportions of the items of income deemed to have been distributed to the beneficiaries by the trust (see paragraph (e) of this example):
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Rents (20,550/82,750x$55,900)................................ $13,882Dividends (39,250/82,750x$55,900)................. 26,515Partially tax-exempt interest (7,850/ 5,303 82,750x$55,900)..................................Tax-exempt interest (15,100/82,750x$55,900)....... 10,200 ------------ Total......................................... 55,900
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Accordingly, W will exclude $10,200 of tax-exempt interest from gross income and will receive the credits and exclusion for dividends received and for partially tax-exempt interest provided in sections 34, 116, and 35, respectively, with respect to the dividends and partially tax-exempt interest deemed to have been distributed to her, her share of the dividends being aggregated with other dividends received by her for purposes of the dividend credit and exclusion. In addition, she may deduct a share of the depreciation deduction proportionate to the trust income allocable to her; that is, one-half of the total depreciation deduction, or $5,000. (h) Inasmuch as the sum of the amount of income required to be distributed currently to W ($55,900) and the other amounts properly paid, credited, or required to be distributed to D ($27,950) exceeds the distributable net income ($82,750) of the trust as determined under section 643(a), D is deemed to have received $26,850 ($82,750 less $55,900) for income tax purposes. The character of the amounts deemed distributed to her is determined as follows:
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Rents (20,550/82,750x$26,850)................................ $6,668Dividends (39,250/82,750x$26,850)................. 12,735Partially tax-exempt interest (7,850/ 2,547 82,750x$26,850)..................................Tax-exempt interest (15,100/82,750x$26,850)....... 4,900 ------------ Total......................................... 26,850
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Accordingly, D will exclude $4,900 of tax-exempt interest from gross income and will receive the credits and exclusion for dividends received and for partially tax-exempt interest provided in sections 34, 116, and 35, respectively, with respect to the dividends and partially tax-exempt interest deemed to have been distributed to her, her share of the dividends being aggregated with other dividends received by her for purposes of the dividend credit and exclusion. In addition, she may deduct a share of the depreciation deduction proportionate to the trust income allocable to her; that is, one-fourth of the total depreciation deduction, or $2,500. (i) [Reserved]
(j) The remaining $2,500 of the depreciation deduction is allocated to the amount distributed to charity X and is hence non-deductible by the trust, W, or D. (See §1.642(e)–1.)
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