Treasury Regulations, Subchapter A, Sec. 1.662(c)-4
From TaxAlmanac
Sec. 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:
(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:
(c) The distributable net income of the trust as computed under section 643(a) is $82,750, determined as follows:
<p>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)). </p> (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:
(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.
<p>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). </p> (f) The taxable income of the trust is $9,900 determined as follows:
(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):
<p>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. </p> (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:
<p>Accordingly, D will exclude $4,900 of tax-exempt interest from gross income and will receive the crddits 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. </p> (i) [Reserved] <p> (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.)</p>
Rents........................................................ $50,000
Dividends of domestic corporations................ 50,000
Tax-exempt interest............................... 20,000
Partially tax-exempt interest..................... 10,000
Capital gains (long term)......................... 20,000
Depreciation of rental property................... 10,000
Expenses attributable to rental income............ 15,400
Trustee's commissions allocable to income account. 2,800
Trustee's commissions allocable to principal 1,100
account..........................................
Rents........................................................ $50,000
Dividends......................................... 50,000
Tax-exempt interest............................... 20,000
Partially tax-exempt interest..................... 10,000
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Total......................................... 130,000
Less:
Rental expenses................................. $15,400
Trustee's commissions allocable to income 2,800
account........................................
____ 18,200
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Income as computed under section 643(b)....... 111,800
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Rents............................ ........... ........... $50,000
Dividends........................ ........... ........... 50,000
Partially tax-exempt interest.... ........... ........... 10,000
Tax-exempt interest.............. ........... $20,000
Less:
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
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Total........................ ........... ........... 125,100
Deductions:
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
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Distributable net income..... ........... ........... 82,750
------------------------------------------------------------------------
Distributable net income..................................... $82,750
Less:
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
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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 $130,000
Less:
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
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Total deductions.................... 29,450 10,750 0 4,900 2,150 47,250
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Amounts distributable to beneficiaries.. 20,550 39,200 50 15,100 7,850 82,750
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Rental income................................................ $50,000
Dividends ($50,000 less $50 exclusion)............ 49,950
Partially tax-exempt interest..................... 10,000
Capital gains..................................... 20,000
------------
Gross income.................................. 129,950
Deductions:
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
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Taxable income........................................... 9,900
Rents (20,550/82,750x$55,900)................................ $13,882
Dividends (39,250/82,750x$55,900)................. 26,515
Partially tax-exempt interest (7,850/ 5,303
82,750x$55,900)..................................
Tax-exempt interest (15,100/82,750x$55,900)....... 10,200
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Total......................................... 55,900
Rents (20,550/82,750x$26,850)................................ $6,668
Dividends (39,250/82,750x$26,850)................. 12,735
Partially tax-exempt interest (7,850/ 2,547
82,750x$26,850)..................................
Tax-exempt interest (15,100/82,750x$26,850)....... 4,900
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Total......................................... 26,850
