[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)-5]

[Page 51]
 
                       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)-5  Example.

    The application of section 642(h) may be illustrated by the 
following example:

    Example. (a) A decedent dies January 31, 1954, leaving a will which 
provides for distributing all her estate equally to A and an existing 
trust for B. The period of administration of the estate terminates on 
December 31, 1954, at which time all the property of the estate is 
distributed to A and the trust. A reports his income for tax purposes on 
a calendar year basis, and the trust reports its income on the basis of 
a fiscal year ending August 31. During the period of the administration, 
the estate has the following items of income and deductions:

Taxable interest...........................................   $2,500
Business income............................................    3,000
                                                            ------------
    Total..................................................    5,500
                                                            ============
Business expenses (including administrative expense            5,000
 allocable to business income).............................
Administrative expenses and corpus commissions not             9,800
 allocable to business income..............................
                                                            ------------
    Total deductions.......................................   14,800


    It also has a capital loss of $5,000.
    (b) Under section 642(h)(1), an unused net operating loss carryover 
of the estate on termination of $2,000 will be allowable to: A to the 
extent of $1,000 for his taxable year 1954 and the next four taxable 
years in accordance with section 172; and to the trust to the extent of 
$1,000 for its taxable year ending August 31, 1955, and its next four 
taxable years. The amount of the net operating loss carryover is 
computed as follows:

Deductions of estate for 1954...........................     $14,800
Less adjustment under section 172(d)(4) (deductions not        7,300
 attributable to a trade or business ($9,800) allowable
 only to extent of gross income not derived from such
 trade or business ($2,500))............................
                                                         ---------------
  Deductions as adjusted................................       7,500
Gross income of estate for 1954.........................       5,500
                                                         ---------------
  Net operating loss of estate for 1954.................       2,000
(No deduction for capital loss of $5,000 under section
 172(d)(2))



Neither A nor the trust will be allowed to carry back any part of the 
net operating loss made available to them under section 642(h)(1).
    (c) Under section 642(h)(2), excess deductions of the estate of 
$7,300 will be allowed as a deduction to A to the extent of $3,650 for 
the calendar year 1954 and to the trust to the extent of $3,650 for the 
taxable year ending August 31, 1955. The deduction of $7,300 for 
administrative expenses and corpus commissions is the only amount which 
was not taken into account in determining the net operating loss of the 
estate ($9,800 of such expenses less $2,500 taken into account).
    (d) Under section 642(h)(1), there will be allowable to A a capital 
loss carryover of $2,500 for his taxable year 1954 and for his next 4 
taxable years in accordance with paragraph (a) of Sec. 1.1212-1. There 
will be allowable to the trust a similar capital loss carryover of 
$2,500 for its taxable year ending August 31, 1955, and its next 4 
taxable years (but see paragraph (b) of Sec. 1.643(a)-3), (for taxable 
years beginning after December 31, 1963, net capital losses may be 
carried over indefinitely by beneficiaries other than corporations, in 
accordance with Sec. 1.642(h)-1 and paragraph (b) of Sec. 1.1212-1.)
    (e) The carryovers and excess deductions are not allowable directly 
to B, the trust beneficiary, but to the extent the distributable net 
income of the trust is reduced by the carryovers and excess deductions B 
may receive indirect benefit.

[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6828, 30 FR 
7806, June 17, 1965]