[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.642(h)-1]

[Page 48-49]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.642(h)-1  Unused loss carryovers on termination of an estate or 
trust.

    (a) If, on the final termination of an estate or trust, a net 
operating loss carryover under section 172 or a capital loss carryover 
under section 1212 would be allowable to the estate or trust in a 
taxable year subsequent to the taxable year of termination but for the 
termination, the carryover or carryovers are allowed under section 
642(h)(1) to the beneficiaries succeeding to the property of the estate 
or trust. See Sec. 1.641(b)-3 for the determination of when an estate 
or trust terminates.
    (b) The net operating loss carryover and the capital loss carryover 
are the same in the hands of a beneficiary as in the estate or trust, 
except that the capital loss carryover in the hands of a beneficiary 
which is a corporation is a short-term loss irrespective of whether it 
would have been a long-term or short-term capital loss in the hands of 
the estate or trust. The net operating loss carryover and the capital 
loss carryover are taken into account in computing taxable income, 
adjusted gross income, and the tax imposed by section 56 (relating to 
the minimum tax for tax preferences). The first taxable year of the 
beneficiary to which the loss shall be carried over is the taxable year 
of the beneficiary in which or with which the estate or trust 
terminates. However, for purposes of determining the number of years to 
which a net operating loss, or a capital loss under paragraph (a) of 
Sec. 1.1212-1, may be carried over by a beneficiary, the last taxable 
year of the estate or trust (whether or not a short taxable year) and 
the first taxable year of the beneficiary to which a loss is carried 
over each constitute a taxable year, and, in the case of a beneficiary 
of an estate or trust that is a corporation, capital losses carried over 
by the estate or trust to any taxable year of the estate or trust 
beginning after December 31, 1963, shall be treated as if they were 
incurred in the last taxable year of the estate or

[[Page 49]]

trust (whether or not a short taxable year). For the treatment of the 
net operating loss carryover when the last taxable year of the estate or 
trust is the last taxable year to which such loss can be carried over, 
see Sec. 1.642(h)-2.
    (c) The application of this section may be illustrated by the 
following examples:

    Example 1. A trust distributes all of its assets to A, the sole 
remainderman, and terminates on December 31, 1954, when it has a capital 
loss carryover of $10,000 attributable to transactions during the 
taxable year 1952. A, who reports on the calendar year basis, otherwise 
has ordinary income of $10,000 and capital gains of $4,000 for the 
taxable year 1954. A would offset his capital gains of $4,000 against 
the capital loss of the trust and, in addition, deduct under section 
1211(b) $1,000 on his return for the taxable year 1954. The balance of 
the capital loss carryover of $5,000 may be carried over only to the 
years 1955 and 1956, in accordance with paragraph (a) of Sec. 1.1212-1 
and the rules of this section.
    Example 2. A trust distributes all of its assets, one-half to A, an 
individual, and one-half to X, a corporation, who are the sole 
remaindermen, and terminates on December 31, 1966, when it has a short-
term capital loss carryover of $20,000 attributable to short-term 
transactions during the taxable years 1964, 1965, and 1966, and a long-
term capital loss carryover of $12,000 attributable to long-term 
transactions during such years. A, who reports on the calendar year 
basis, otherwise has ordinary income of $15,000, short-term capital 
gains of $4,000 and long-term capital gains of $6,000, for the taxable 
year 1966. A would offset his short-term capital gains of $4,000 against 
his share of the short-term capital loss carryover of the trust, $10,000 
(one-half of $20,000), and, in addition deduct under section 1211(b) 
$1,000 (treated as a short-term gain for purposes of computing capital 
loss carryovers) on his return for the taxable year 1966. A would also 
offset his long-term capital gains of $6,000 against his share of the 
long-term capital loss carryover of the trust, $6,000 (one-half of 
$12,000). The balance of A's share of the short-term capital loss 
carryover, $5,000, may be carried over as a short-term capital loss 
carryover to the succeeding taxable year and treated as a short-term 
capital loss incurred in such succeeding taxable year in accordance with 
paragraph (b) of Sec. 1.1212-1. X, which also reports on the calendar 
year basis, otherwise has capital gains of $4,000 for the taxable year 
1966. X would offset its capital gains of $4,000 against its share of 
the capital loss carryovers of the trust, $16,000 (the sum of one-half 
of each the short-term carryover and the long-term carryover of the 
trust), on its return for the taxable year 1966. The balance of X's 
share, $12,000, may be carried over as a short-term capital loss only to 
the years 1967, 1968, 1969, and 1970, in accordance with paragraph (a) 
of Sec. 1.1212-1 and the rules of this section.

[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6828, 30 FR 
7805, June 17, 1965; T.D. 7564, 43 FR 40495, Sept. 12, 1978]