[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: 26CFR1.652(b)-3]

[Page 100-101]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.652(b)-3  Allocation of deductions.

    Items of deduction of a trust that enter into the computation of 
distributable net income are to be allocated among the items of income 
in accordance with the following principles:
    (a) All deductible items directly attributable to one class of 
income (except dividends excluded under section 116) are allocated 
thereto. For example, repairs to, taxes on, and other expenses directly 
attributable to the maintenance of rental property or the collection of 
rental income are allocated to rental income. See Sec. 1.642(e)-1 for 
treatment of depreciation of rental property. Similarly, all 
expenditures directly attributable to a business carried on by a trust 
are allocated to the income from such business. If the deductions 
directly attributable to a particular class of income exceed that 
income, the excess is applied against other classes of income in the 
manner provided in paragraph (d) of this section.
    (b) The deductions which are not directly attributable to a specific 
class of income may be allocated to any item of income (including 
capital gains) included in computing distributable net income, but a 
portion must be allocated to nontaxable income (except dividends 
excluded under section 116) pursuant to section 265 and the regulations 
thereunder. For example, if the income of a trust is $30,000 (after 
direct expenses), consisting equally of $10,000 of dividends, tax-exempt 
interest, and rents, and income commissions amount to $3,000, one-third 
($1,000) of such commissions should be allocated to tax-exempt interest, 
but the balance of $2,000 may be allocated to the rents or dividends in 
such proportions as the trustee may elect. The fact that the governing 
instrument or applicable local law treats certain items of deduction as 
attributable to corpus or to income not included in distributable net 
income does not affect allocation under this paragraph. For instance, if 
in the example set forth in this paragraph the trust also had capital 
gains which are allocable to corpus under the terms of the trust 
instrument, no part of the deductions would be allocable thereto since 
the capital gains are excluded from the computation of distributable net 
income under section 643(a)(3).
    (c) Examples of expenses which are considered as not directly 
attributable to a specific class of income are trustee's commissions, 
the rental of safe deposit boxes, and State income and personal property 
taxes.
    (d) To the extent that any items of deduction which are directly 
attributable to a class of income exceed that class of income, they may 
be allocated to any other class of income (including capital gains) 
included in distributable net income in the manner provided in paragraph 
(b) of this section, except that any excess deductions attributable to 
tax-exempt income (other than dividends excluded under section 116) may 
not be offset against any other class of income. See section 265 and the 
regulations thereunder. Thus, if the trust has rents, taxable interest, 
dividends, and tax-exempt interest, and the deductions directly 
attributable to the rents exceed the rental income, the excess may be 
allocated to the taxable

[[Page 101]]

interest or dividends in such proportions as the fiduciary may elect. 
However, if the excess deductions are attributable to the tax-exempt 
interest, they may not be allocated to either the rents, taxable 
interest, or dividends.