[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)-2]

[Page 49-50]
 
                       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)-2  Excess deductions on termination of an estate or trust.

    (a) If, on the termination of an estate or trust, the estate or 
trust has for its last taxable year deductions (other than the 
deductions allowed under section 642(b) (relating to personal exemption) 
or section 642(c) (relating to charitable contributions)) in excess of 
gross income, the excess is allowed under section 642(h)(2) as a 
deduction to the beneficiaries succeeding to the property of the estate 
or trust. The deduction is allowed only in computing taxable income and 
must be taken into account in computing the items of tax preference of 
the beneficiary; it is not allowed in computing adjusted gross income. 
The deduction is allowable only in the taxable year of the beneficiary 
in which or with which the estate or trust terminates, whether the year 
of termination of the estate or trust is of normal duration or is a 
short taxable year. For example: Assume that a trust distributes all of 
its assets to B and terminates on December 31, 1954. As of that date it 
has excess deductions, for example, because of corpus commissions on 
termination, of $18,000. B, who reported on the calendar year basis, 
could claim the $18,000 as a deduction for the taxable year 1954. 
However, if the deduction (when added to his other deductions) exceeds 
his gross income, the excess may not be carried over to the year 1955 or 
subsequent years.
    (b) A deduction based upon a net operating loss carryover will never 
be allowed to beneficiaries under both paragraphs (1) and (2) of section 
642(h). Accordingly, a net operating loss deduction which is allowable 
to beneficiaries succeeding to the property of the estate or trust under 
the provisions of paragraph (1) of section 642(h) cannot also be 
considered a deduction for purposes of paragraph (2) of section 642(h)

[[Page 50]]

and paragraph (a) of this section. However, if the last taxable year of 
the estate or trust is the last year in which a deduction on account of 
a net operating loss may be taken, the deduction, to the extent not 
absorbed in that taxable year by the estate or trust, is considered an 
``excess deduction'' under section 642(h)(2) and paragraph (a) of this 
section.
    (c) Any item of income or deduction, or any part thereof, which is 
taken into account in determining the net operating loss or capital loss 
carryover of the estate or trust for its last taxable year shall not be 
taken into account again in determining excess deductions on termination 
of the trust or estate within the meaning of section 642(h)(2) and 
paragraph (a) of this section (see example in Sec. 1.642(h)-5).

[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 7564, 43 FR 
40495, Sept. 12, 1978]