1.652(c)-4 Illustration of the provisions of sections 651 and 652.
§ 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:
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 account
1,300
Depreciation
5,000
(b) The income of the trust for fiduciary accounting purposes is
$92,400, computed as follows:
Rents
$25,000
Dividends
50,000
Tax-exempt interest
25,000
Total
100,000
Deductions:
Expenses
directly attributable to rental income
$5,000
Trustee's
commissions allocable to income account
2,600
7,600
Income computed under section 643(b)
92,400
One-half ($46,200) of the income of $92,400 is currently
distributable to each beneficiary. (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):
Trustee's
commissions ($3,900 less $975 allocable to tax-exempt
interest)
2,925
- - - -
7,925
Distributable
net income
91,100
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. (d) The deduction allowable to the trust under section
651(a) for distributions to the beneficiaries is $67,025, computed
as follows:
Distributable net income computed under section 643(a) (see
paragraph (c))
$91,100
Less:
Tax-exempt
interest as adjusted
$24,025
Dividend
exclusion
50
- - - -
24,075
Distributable net income as determined under section 651(b)
67,025
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. (e) The taxable income of the trust is $7,200 computed as
follows:
Rents
$25,000
Dividends ($50,000 less $50 exclusion)
49,950
Long-term capital gains
15,000
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
Taxable
income
7,200
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. (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:
Rents
Dividends
Tax-exempt interest
Total
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
Total
deductions
7,925
0
975
8,900
Character of
amounts in the hands of the beneficiaries
17,075
50,000
24,025
1 91,100
1 Distributable net income.
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. [T.D.
6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6712, 29 FR
3655, Mar. 24, 1964]