[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1312-5]

[Page 633-634]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1312-5  Correlative deductions and inclusions for trusts or 
estates and legatees, beneficiaries, or heirs.

    (a) Paragraph (5) of section 1312 applies to distributions by a 
trust or an estate to the beneficiaries, heirs, or legatees. If the 
determination relates to the amount of the deduction allowed by sections 
651 and 661 or the inclusion

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in taxable income of the beneficiary required by sections 652 and 662 
(including amounts falling within subpart D, subchapter J, chapter 1 of 
the Code, relating to treatment of excess distributions by trusts), or 
if the determination relates to the additional deduction (or inclusion) 
specified in section 162 (b) and (c) of the Internal Revenue Code of 
1939 (or the corresponding provisions of a prior revenue act), with 
respect to amounts paid, credited, or required to be distributed to the 
beneficiaries, heirs, and legatees, and such determination requires:
    (1) The allowance to the estate or trust of the deduction when such 
amounts have been erroneously omitted or excluded from the income of the 
beneficiaries, heirs, or legatees; or
    (2) The inclusion of such amounts in the income of the 
beneficiaries, heirs, or legatees when the deduction has been 
erroneously disallowed to or omitted by the estate or trust; or
    (3) The disallowance to an estate or trust of the deduction when 
such amounts have been erroneously included in the income of the 
beneficiaries, heirs, or legatees; or
    (4) The exclusion of such amounts from the income of the 
beneficiaries, heirs, or legatees when the deduction has been 
erroneously allowed to the estate or trust.
    (b) The application of paragraph (a)(1) of this section may be 
illustrated by the following example:

    Example: For the taxable year 1954, a trustee, directed by the trust 
instrument to accumulate the trust income, made no distribution to the 
beneficiary and returned the entire income as taxable to the trust. 
Accordingly the beneficiary did not include the trust income in his 
return for the year 1954. In 1957, a State court holds invalid the 
clause directing accumulation and determines that the income is required 
to be currently distributed. It also rules that certain extraordinary 
dividends which the trustee in good faith allocated to corpus in 1954 
were properly allocable to income. In 1958, the trustee, relying upon 
the court decision, files a claim for refund of the tax paid on behalf 
of the trust for the year 1954 and thereafter files a suit in the 
District Court. The claim is sustained by the court (except as to the 
tax on the extraordinary dividends) in 1959 after the expiration of the 
period of limitations upon deficiency assessments against the 
beneficiary for the year 1954. An adjustment is authorized with respect 
to the beneficiary's tax for the year 1954. The treatment of the 
distribution to the beneficiary of the extraordinary dividends shall be 
determined under subpart D of subchapter J.

    (c) The application of paragraph (a)(2) of this section may be 
illustrated by the following example:

    Example: Assume the same facts as in the example in paragraph (b) of 
this section, except that, instead of the trustee's filing a refund 
claim, the Commissioner, relying upon the decision of the State court, 
asserts a deficiency against the beneficiary for 1954. The deficiency is 
sustained by final decision of the Tax Court of the United States in 
1959, after the expiration of the period for filing claim for refund on 
behalf of the trust for 1954. An adjustment is authorized with respect 
to the trust for the year 1954.

    (d) The application of paragraph (a)(3) of this section may be 
illustrated by the following example:

    Example: A trustee claimed in the trust return for 1954 for amounts 
paid to the beneficiary a deduction to the extent of distributable net 
income. This amount was included by the beneficiary in gross income in 
his return for 1954. In computing distributable net income the trustee 
had included short and long-term capital gains. In 1958, the 
Commissioner asserts a deficiency against the trust on the ground that 
the capital gains were not includible in distributable net income, and 
that, therefore, the gains were taxable to the trust, not the 
beneficiary. The deficiency is sustained by a final decision of the Tax 
Court in 1960, after the expiration of the period for filing claims for 
refund by the beneficiary for 1954. An adjustment is authorized with 
respect to the beneficiary's tax for the year 1954, based on the 
exclusion from 1954 gross income of the capital gains previously 
considered distributed by the trust under section 662.

    (e) The application of paragraph (a)(4) of this section may be 
illustrated by the following example:

    Example: Assume the same facts as in the example in paragraph (d) of 
this section, except that, instead of the Commissioner's asserting a 
deficiency, the beneficiary filed a refund claim for 1954 on the same 
ground. The claim is sustained by the court in 1960 after the expiration 
of the period of limitations upon deficiency assessments against the 
trust for 1954. An adjustment is authorized with respect to the trust 
for the year 1954.

[T.D. 6500, 25 FR 12034, Nov. 26, 1960]

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