1.661(c)-2 Illustration of the provisions of section 661.
§ 1.661(c)-2 Illustration of the provisions of section 661.
The provisions of section 661 may be illustrated by the
following example:
Example.(a) Under the terms of a trust, which reports on the
calendar year basis, $10,000 a year is required to be paid out of
income to a designated charity. The balance of the income may, in
the trustee's discretion, be accumulated or distributed to
beneficiary A. Expenses are allocable against income and the trust
instrument requires a reserve for depreciation. During the taxable
year 1955 the trustee contributes $10,000 to charity and in his
discretion distributes $15,000 of income to A. The trust has the
following items of income and expense for the taxable year 1955:
Dividends $10,000 Partially tax-exempt interest 10,000 Fully
tax-exempt interest 10,000 Rents 20,000 Rental expenses 2,000
Depreciation of rental property 3,000 Trustee's commissions
5,000(b) The income of the trust for fiduciary accounting purposes
is $40,000, computed as follows:
Dividends
$10,000
Partially tax-exempt interest
10,000
Fully
tax-exempt interest
10,000
Rents
20,000
Total
50,000
Less:
Rental
expenses
$2,000
Depreciation
3,000
Trustee's
commissions
5,000
10,000
Income as computed under section 643(b)
40,000
(c) The distributable net income of the trust as computed under
section 643(a) is $30,000, determined as follows:
Trustee's
commissions ($5,000 less $1,000 allocated to tax-exempt
interest)
4,000
Charitable
contributions ($10,000 less $2,000 allocated to tax-exempt
interest)
8,000
17,000
Distributable
net income (section 643(a))
30,000
(d) The character of the amounts distributed under section 661(a),
determined in accordance with the rules prescribed in §§ 1.661(b)-1
and 1.661(b)-2 is shown by the following table (for the purpose of
this allocation, it is assumed that the trustee elected to allocate
the trustee's commissions to rental income except for the amount
required to be allocated to tax-exempt interest):
Rental income
Taxable dividends
Excluded dividends
Partially tax-exempt
interest
Tax-exempt interest
Total
Trust income
$20,000
$9,950
$50
$10,000
$10,000
$50,000
Less:
Charitable
contributions
4,000
2,000
2,000
2,000
10,000
Rental
expenses
2,000
2,000
Depreciation
3,000
3,000
Trustee's
commissions
4,000
1,000
5,000
Total
deductions
13,000
2,000
0
2,000
3,000
20,000
Distributable net
income
7,000
7,950
50
8,000
7,000
30,000
Amounts deemed
distributed under section 661(a) before applying the limitation of
section 661(c)
3,500
3,975
25
4,000
3,500
15,000
In the absence of specific provisions in the trust instrument for
the allocation of different classes of income, the charitable
contribution is deemed to consist of a pro rata portion of the
gross amount of each items of income of the trust (except dividends
excluded under section 116) and the trust is deemed to have
distributed to A a pro rata portion (one-half) of each item of
income included in distributable net income. (e) The taxable income
of the trust is $11,375 computed as follows:
Rental
income
$20,000
Dividends ($10,000 less $50 exclusion)
9,950
Partially tax-exempt interest
10,000
Gross income
39,950
Deductions:
Rental
expenses
$2,000
Depreciation of
rental property
3,000
Trustee's
commissions
4,000
Charitable
contributions
8,000
Distributions
to A
11,475
Personal
exemption
100
28,575
Taxable income
11,375
In computing the taxable income of the trust no deduction is
allowable for the portions of the charitable contributions
deduction ($2,000) and trustee's commissions ($1,000) which are
treated under section 661(b) as attributable to the tax-exempt
interest excludable from gross income. Also, of the dividends of
$4,000 deemed to have been distributed to A under section 661(a),
$25 (25/50ths of $50) is deemed to have been distributed from the
excluded dividends and is not an allowable deduction to the trust.
Accordingly, the deduction allowable under section 661 is deemed to
be composed of $3,500 rental income, $3,975 of dividends, and
$4,000 partially tax-exempt interest. No deduction is allowable for
the portion of tax-exempt interest or for the portion of the
excluded dividends deemed to have been distributed to the
beneficiary. (f) The trust is entitled to the credit allowed by
section 34 with respect to dividends of $5,975 ($9,950 less $3,975
distributed to A) included in gross income. Also, the trust is
allowed the credit provided by section 35 with respect to partially
tax-exempt interest of $6,000 ($10,000 less $4,000 deemed
distributed to A) included in gross income.
(g) Dividends of $4,000 allocable to A are to be aggregated with
his other dividends (if any) for purposes of the dividend exclusion
under section 116 and the dividend received credit under section
84.