Treasury Regulations, Subchapter A, Sec. 1.652(c)-4
From TaxAlmanac
Sec. 1.652(c)-4 Illustration of the provisions of sections 651 and 652
The rules applicable to a trust required to distribute all of its income currently to its beneficiaries may be illustrated by the following example:
Example.
(a) Under the terms of a simple trust all of the income is to be distributed equally to beneficiaries A and B and capital gains are to be allocated to corpus. The trust and both beneficiaries file returns on the calendar year basis. No provision is made in the governing instrument with respect to depreciation. During the taxable year 1955, the trust had the following items of income and expense:
(b) The income of the trust for fiduciary accounting purposes is $92,400, computed as follows:
<p>One-half ($46,200) of the income of $92,400 is currently distributable to each beneficiary. </p> (c) The distributable net income of the trust computed under section 643(a) is $91,100, determined as follows (cents are disregarded in the computation):
<p>In computing the distributable net income of $91,100, the taxable income of the trust was computed with the following modifications: No deductions were allowed for distributions to the 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)); the tax-exempt interest (as adjusted for expenses) and the dividend exclusion of $50 were included (section 643(a) (5) and (7)). Since all of the income of the trust is required to be currently distributed, no deduction is allowable for depreciation in the absence of specific provisions in the governing instrument providing for the keeping of the trust corpus intact. See section 167(h) and the regulations thereunder. </p> (d) The deduction allowable to the trust under section 651(a) for distributions to the beneficiaries is $67,025, computed as follows:
<p>Since the amount of the income ($92,400) required to be distributed currently by the trust exceeds the distributable net income ($67,025) as computed under section 651(b), the deduction allowable under section 651(a) is limited to the distributable net income of $67,025. </p> (e) The taxable income of the trust is $7,200 computed as follows:
<p>The trust is not allowed a deduction for the portion ($975) of the trustee's commissions allocable to tax-exempt interest in computing its taxable income. </p> (f) In determining the character of the amounts includible in the gross income of A and B, it is assumed that the trustee elects to allocate to rents the expenses not directly attributable to a specific item of income other than the portion ($975) of such expenses allocated to tax-exempt interest. The allocation of expenses among the items of income is shown below:
<p>Inasmuch as the income of the trust is to be distributed equally to A and B, each is deemed to have received one-half of each item of income; that is, rents of $8,537.50, dividends of $25,000, and tax-exempt interest of $12,012.50. The dividends of $25,000 allocated to each beneficiary are to be aggregated with his other dividends (if any) for purposes of the dividend exclusion provided by section 116 and the dividend received credit allowed under section 34. Also, each beneficiary is allowed a deduction of $2,500 for depreciation of rental property attributable to the portion (one-half) of the income of the trust distributed to him.</p>
<p>[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6712, 29 FR 3655, Mar. 24, 1964] </p>
Rents........................................................ $25,000
Dividends of domestic corporations................ 50,000
Tax-exempt interest on municipal bonds............ 25,000
Long-term capital gains........................... 15,000
Taxes and expenses directly attributable to rents. 5,000
Trustee's commissions allocable to income account. 2,600
Trustee's commissions allocable to principal 1,300
account..........................................
Depreciation...................................... 5,000
Rents........................................................ $25,000
Dividends......................................... 50,000
Tax-exempt interest............................... 25,000
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Total......................................... 100,000
Deductions:
Expenses directly attributable to rental income. $5,000
Trustee's commissions allocable to income 2,600
account........................................
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7,600
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Income computed under section 643(b).......... 92,400
Rents........................................................ $25,000
Dividends......................................... 50,000
Tax-exempt interest............................... $25,000
Less: Expenses allocable thereto (25,000/100,000 975
x$3,900).........................................
____ 24,025
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Total......................................... ......... 99,025
Deductions:
Expenses directly attributable to rental income. $5,000
Trustee's commissions ($3,900 less $975 2,925
allocable to tax-exempt interest)..............
____ 7,925
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Distributable net income...................... ......... 91,100
Distributable net income computed under section 643(a) (see $91,100
paragraph (c))..............................................
Less:
Tax-exempt interest as adjusted................. $24,025
Dividend exclusion.............................. 50
____ 24,075
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Distributable net income as determined under section 67,025
651(b)..................................................
Rents........................................................ $25,000
Dividends ($50,000 less $50 exclusion)............ 49,950
Long-term capital gains........................... 15,000
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Gross income.................................. 89,950
Deductions:
Rental expenses................................. $5,000
Trustee's commissions........................... 2,925
Capital gain deduction.......................... 7,500
Distributions to beneficiaries.................. 67,025
Personal exemption.............................. 300
____ 82,750
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Taxable income................................ ......... 7,200
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Tax-exempt
Rents Dividends interest Total
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Income for trust accounting purposes................. $25,000 $50,000 $25,000 $100,000
Less:
Rental expenses.................................... 5,000 ............ ............... 5,000
Trustee's commissions.............................. 2,925 ............ 975 3,900
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Total deductions................................. 7,925 0 975 8,900
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Character of amounts in the hands of the 17,075 50,000 24,025 \1\ 91,100
beneficiaries.......................................
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\1\ Distributable net income.
