Treasury Regulations, Subchapter A, Sec. 1.642(h)-5

From TaxAlmanac

The application of section 642(h) may be illustrated by the following example:

Example.   (a) A decedent dies January 31, 1954, leaving a will which provides for distributing all her estate equally to A and an existing trust for B. The period of administration of the estate terminates on December 31, 1954, at which time all the property of the estate is distributed to A and the trust. A reports his income for tax purposes on a calendar year basis, and the trust reports its income on the basis of a fiscal year ending August 31. During the period of the administration, the estate has the following items of income and deductions:

 
 
 
Taxable interest   $2,500
Business income    3,000
                  ---------------------------------------------
    Total........  5,500
                  =============================================
Business expenses  5,000
 (including
 administrative
  expense
 allocable to
 business income)
Administrative     9,800
 expenses and
   corpus
 commissions not
 allocable to
 business income
                  ---------------------------------------------
    Total          14,800
     deductions..
 

 
 
 
Deductions of      $14,800
 estate for 1954
Less adjustment    7,300
 under section
 172(d)(4)
 (deductions not
 attributable to
 a trade or
 business
 ($9,800)
 allowable only
 to extent of
 gross income not
 derived from
 such trade or
 business
 ($2,500))
                  ------------------------------------------
  Deductions as    7,500
   adjusted......
Gross income of    5,500
 estate for 1954
                  ------------------------------------------
  Net operating    2,000
   loss of estate
   for 1954......
(No deduction for
 capital loss of
 $5,000 under
 section
 172(d)(2))
 

<p>Neither A nor the trust will be allowed to carry back any part of the net operating loss made available to them under section 642(h)(1). </p>  (c) Under section 642(h)(2), excess deductions of the estate of $7,300 will be allowed as a deduction to A to the extent of $3,650 for the calendar year 1954 and to the trust to the extent of $3,650 for the taxable year ending August 31, 1955. The deduction of $7,300 for administrative expenses and corpus commissions is the only amount which was not taken into account in determining the net operating loss of the estate ($9,800 of such expenses less $2,500 taken into account). <p> (d) Under section 642(h)(1), there will be allowable to A a capital loss carryover of $2,500 for his taxable year 1954 and for his next 4 taxable years in accordance with paragraph (a) of §1.1212–1. There will be allowable to the trust a similar capital loss carryover of $2,500 for its taxable year ending August 31, 1955, and its next 4 taxable years (but see paragraph (b) of §1.643(a)–3), (for taxable years beginning after December 31, 1963, net capital losses may be carried over indefinitely by beneficiaries other than corporations, in accordance with §1.642(h)–1 and paragraph (b) of §1.1212–1.) </p> <p> (e) The carryovers and excess deductions are not allowable directly to B, the trust beneficiary, but to the extent the distributable net income of the trust is reduced by the carryovers and excess deductions B may receive indirect benefit.</p> <p>[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6828, 30 FR 7806, June 17, 1965]</p>