Section

[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.47-5]

[Page 316-318]

TITLE 26--INTERNAL REVENUE

CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY

PART 1--INCOME TAXES--Table of Contents

Sec. 1.47-5 Estates and trusts.

(a) In general--(1) Disposition or cessation in hands of estate or
trust. If an estate or trust disposes of any section 38 property (or if
any section 38 property otherwise ceases to be section 38 property in
the hands of the estate or trust) before the close of the estimated
useful life which was taken into account in computing qualified
investment with respect to such property, a recapture determination
shall be made with respect to the estate or trust, and each beneficiary
who is treated, under Sec. 1.48-6, as a taxpayer with respect to such
property. Each such recapture determination shall be made with respect
to the share of the basis (or cost) of such property taken into account
by such estate or trust and such beneficiary in computing its or his
each such recapture determination the actual useful life of such
property shall be the period beginning with the date on which it was
placed in service by the estate or trust and ending with the date of the
disposition or cessation. In making a recapture determination under this
subparagraph with respect to a taxpayer there shall be taken into
account any prior recapture determinations made with respect to such
taxpayer in connection with the same property. For definition of
``recapture determination'' see paragraph (a)(1) of Sec. 1.47-1.
(2) Disposition of interest. (i) If--
(a) The basis (or cost) of section 38 property is apportioned, under
Sec. 1.48-6, to an estate or trust which, or to a beneficiary of an
estate or trust who, takes such basis (or cost) into account in
computing his qualified investment, and
(b) After the date on which such section 38 property was placed in
service by the estate or trust and before the close of the estimated
useful life of the property, such estate's, trust's, or such
beneficiary's proportionate interest in the income of the estate or
trust is reduced (for example, by a sale, or by the terms of the estate
or trust instrument) below the percentage specified in subdivision (ii)
of this subparagraph, then, on the date of such reduction, such section
38 property ceases to be section 38 property with respect to such
estate, trust, or beneficiary to the extent of the actual reduction in
such estate's, trust's, or beneficiary's proportionate interest in the
income of the estate or trust. (For example, if $100 of the basis of
section 38 property was apportioned to a beneficiary and if his
proportionate interest in the income of the estate or trust is reduced
from 60 percent to 30 percent (that is, 50 percent of his original
interest), then such property shall be treated as having ceased to be
section 38 property to the extent of $50). Accordingly, a recapture
determination shall be made with respect to such estate, trust, or

[[Page 317]]

beneficiary. For purposes of such recapture determination the actual
useful life of such property shall be the period beginning with the date
on which it was placed in service by the estate or trust and ending with
the date on which it is treated as having ceased to be section 38
property with respect to the estate, trust, or beneficiary. In making a
recapture determination under this subparagraph there shall be taken
into account any prior recapture determination made with respect to the
estate, trust, or beneficiary in connection with the same property.
(ii) The percentage referred to in subdivision (i)(b) of this
subparagraph is 66\2/3\ percent of the estate's, trust's, or
beneficiary's proportionate interest in the income of the estate or
trust for the taxable year of the apportionment under Sec. 1.48-6.
However, once property has been treated under this subparagraph as
having ceased to be section 38 property to any extent the percentage
referred to shall be 33\1/3\ percent of the estate's, trust's, or
beneficiary's proportionate interest in the income of the estate or
trust for the taxable year of the apportionment under Sec. 1.48-6.
(iii) In determining a beneficiary's proportionate interest in the
income of an estate or trust for purposes of this subparagraph, the
beneficiary shall be considered to own any interest in such an estate or
trust which he owns directly or indirectly (through ownership in other
entities provided such other entities' bases in such interest are
determined in whole or in part by reference to the basis of such
interest in the hands of the beneficiary). For example, if A, whose
proportionate interest in the income of trust X is 30 percent, transfers
all of such interest to corporation Y in exchange for all of the stock
of Y in a transaction to which section 351 applies, then, for purposes
of subdivision (i) of this subparagraph, A shall be considered to own a
30-percent interest in trust X. Any taxpayer who seeks to establish his
interest in an estate or trust under the rule of this subdivision shall
maintain adequate records to demonstrate his indirect interest in the
estate or trust after any such transfer or transfers.
(b) Examples. Paragraph (a) of this section may be illustrated by
the following examples in each of which it is assumed that XYZ Trust,
which makes its returns on the basis of the calendar year, acquired and
placed in service on June 1, 1962, three items of section 38 property.
The basis and estimated useful life of each item of section 38 property
are as follows:

------------------------------------------------------------------------
Estimated
useful
Asset No. Basis life
(Years)
------------------------------------------------------------------------
1............................................... $30,000 4
2............................................... 30,000 6
3............................................... 30,000 8
------------------------------------------------------------------------

For the taxable year 1962 the income of XYZ Trust is $20,000, which is
allocable equally to XYZ Trust and beneficiary A. Beneficiary A makes
his returns on the basis of a calendar year. Under Sec. 1.48-6, the
total bases of the section 38 properties was apportioned to XYZ Trust
and beneficiary A as follows:

----------------------------------------------------------------------------------------------------------------
Useful life category
-----------------------------------
4 to 6 6 to 8 8 years or
years years more
----------------------------------------------------------------------------------------------------------------
Total bases................................................. .......... $30,000 $30,000 $30,000
-----------------------------------
($10,000) 15,000 15,000 15,000
------------
XYZ Trust....................................................... ($20,000)
Beneficiary A................................................... ($10,000) 15,000 15,000 15,000
------------
($20,000)
----------------------------------------------------------------------------------------------------------------

Assuming that during 1962 beneficiary A did not place in service any
section 38 property and that he did not own any interests in other
estates, trusts, electing small business corporations, or partnerships,
the qualified investment of XYZ Trust and of beneficiary A is $30,000
each, computed as follows:

[[Page 318]]

$15,000......................................... 66\2/3\ 10,000
$15,000......................................... 100 15,000
-----------------------
30,000
------------------------------------------------------------------------

For the taxable year 1962, XYZ Trust and beneficiary A each had a credit
earned of $2,100 (7 percent of $30,000). Each such credit earned was
allowed under section 38 as a credit against the liability for tax.

Example 1. (i) On December 2, 1965, XYZ Trust sells asset No. 3 to X
Corporation.
(ii) The actual useful life of asset No. 3 is three years and six
months. The recomputed qualified investment with respect to XYZ Trust's
and beneficiary A's share of the basis of asset No. 3 is zero ($15,000
share of basis multiplied by zero applicable percentage) and for the
taxable year 1962, XYZ Trust's and beneficiary A's recomputed credit
earned is $1,050 (7 percent of $15,000). The income tax imposed by
chapter 1 of the Code on XYZ Trust and on beneficiary A for the taxable
year 1965 is increased by the $1,050 decrease in his credit earned for
the taxable year 1962 (that is, $2,100 original credit earned minus
$1,050 recomputed credit earned).
Example 2. (i) On December 3, 1964, beneficiary A sells 50 percent
of his interest in the income of XYZ Trust to B, and on December 3,
1965, A sells his remaining 50 percent interest to C. In addition, on
January 2, 1966, XYZ Trust sells asset No. 3 to Y Corporation.
(ii) Under paragraph (a)(2) of this section, on December 3, 1964, 50
percent of the basis of each of the three items of section 38 property
ceases to be section 38 property with respect to beneficiary A since
immediately after the December 3, 1964, sale A's proportionate interest
in the income of XYZ Trust is reduced to 50 percent of his proportionate
interest in the income of XYZ Trust for the taxable year 1962. The
actual useful life of the share of the bases of the section 38
properties which cease to be section 38 property with respect to A is
two years and six months (that is, the period beginning with June 1,
1962, and ending with December 3, 1964). Beneficiary A's recomputed
qualified investment with respect to such properties is $15,000,
computed as follows:

------------------------------------------------------------------------
Applicable Qualified
Basis percentage investment
------------------------------------------------------------------------
$7,500.......................................... 33\1/3\ $2,500
$7,500.......................................... 66\2/3\ 5,000
$7,500.......................................... 100 7,500
-----------------------
15,000
------------------------------------------------------------------------

For the taxable year 1962 beneficiary A's recomputed credit earned is
$1,050 (7 percent of $15,000). The income tax imposed by chapter 1 of
the Code on beneficiary A for the taxable year 1964 is increased by the
$1,050 decrease in his credit earned for the taxable year 1962 (that is,
$2,100 original credit earned minus $1,050 recomputed credit earned).
(iii) Under paragraph (a)(2) of this section, on December 3, 1965,
the remaining 50 percent of the share of the basis of each of the three
items of section 38 property ceases to be section 38 property with
respect to beneficiary A since immediately after the December 3, 1965,
sale A's proportionate interest in the income of XYZ Trust is reduced to
zero. The actual useful life of the share of the basis of the section 38
properties which cease to be section 38 property with respect to A is
three years and six months (that is, the period beginning with June 1,
1962, and ending with December 3, 1965). A's recomputed qualified
investment with respect to such properties is zero. For the taxable year
1962 beneficiary A's recomputed credit earned is zero. The income tax
imposed by chapter 1 of the Code on beneficiary A for the taxable year
1965 is increased by $1,050 (that is, $2,100 ($2,100 original credit
earned minus zero recomputed credit earned) reduced by the $1,050
increase in tax for 1964).
(iv) The actual useful life of asset No. 3 which was sold on January
2, 1966, is three years and seven months. The recomputed qualified
investment with respect to XYZ Trust's share of the basis of asset No. 3
is zero ($15,000 share of basis multiplied by zero applicable
percentage) and for the taxable year 1962, XYZ Trust's recomputed credit
earned is $1,050 (7 percent of $15,000). The income tax imposed by
chapter 1 of the Code on XYZ Trust for the taxable year 1966 is
increased by the $1,050 decrease in its credit earned for the taxable
year 1962 ($2,100 original credit earned minus $1,050 recomputed credit
earned). The sale of asset No. 3 on January 2, 1966, has no effect on A.

[T.D. 6931, 32 FR 14037, Oct. 10, 1967]