Section

[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(c)-4]

[Page 101-103]

TITLE 26--INTERNAL REVENUE

CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)

PART 1_INCOME TAXES--Table of Contents

Sec. 1.652(c)-4 Illustration of the provisions of sections 651 and 652.

The rules applicable to a trust required to distribute all of its
income currently to its beneficiaries may be illustrated by the
following example:

Example. (a) Under the terms of a simple trust all of the income is
to be distributed equally to beneficiaries A and B and capital gains are
to be allocated to corpus. The trust and both beneficiaries file returns
on the calendar year basis. No provision is made in the governing
instrument with respect to depreciation. During the taxable year 1955,
the trust had the following items of income and expense:

Rents........................................................ $25,000
Dividends of domestic corporations........................... 50,000
Tax-exempt interest on municipal bonds....................... 25,000
Long-term capital gains...................................... 15,000
Taxes and expenses directly attributable to rents............ 5,000
Trustee's commissions allocable to income account............ 2,600
Trustee's commissions allocable to principal account......... 1,300
Depreciation................................................. 5,000

(b) The income of the trust for fiduciary accounting purposes is
$92,400, computed as follows:

Rents........................................................ $25,000
Dividends.................................................... 50,000
Tax-exempt interest.......................................... 25,000
------------
Total.................................................... 100,000
Deductions:
Expenses directly attributable to rental income. $5,000
Trustee's commissions allocable to income 2,600
account........................................
-----------
7,600
------------
Income computed under section 643(b)..................... 92,400

[[Page 102]]

One-half ($46,200) of the income of $92,400 is currently distributable
to each beneficiary.
(c) The distributable net income of the trust computed under section
643(a) is $91,100, determined as follows (cents are disregarded in the
computation):

Rents........................................................ $25,000
Dividends.................................................... 50,000
Tax-exempt interest............................... $25,000
Less: Expenses allocable thereto (25,000/100,000 975
x$3,900).........................................
-------- 24,025
----------
Total......................................... ......... 99,025
Deductions:
Expenses directly attributable to rental income. $5,000
Trustee's commissions ($3,900 less $975 2,925
allocable to tax-exempt interest)..............
-------- 7,925
----------
Distributable net income...................... ......... 91,100

In computing the distributable net income of $91,100, the taxable income
of the trust was computed with the following modifications: No
deductions were allowed for distributions to the beneficiaries and for
personal exemption of the trust (section 643(a) (1) and (2)); capital
gains were excluded and no deduction under section 1202 (relating to the
50-percent deduction for long-term capital gains) was taken into account
(section 643(a)(3)); the tax-exempt interest (as adjusted for expenses)
and the dividend exclusion of $50 were included (section 643(a) (5) and
(7)). Since all of the income of the trust is required to be currently
distributed, no deduction is allowable for depreciation in the absence
of specific provisions in the governing instrument providing for the
keeping of the trust corpus intact. See section 167(h) and the
regulations thereunder.
(d) The deduction allowable to the trust under section 651(a) for
distributions to the beneficiaries is $67,025, computed as follows:

Distributable net income computed under section 643(a) (see $91,100
paragraph (c))..............................................
Less:
Tax-exempt interest as adjusted................. $24,025
Dividend exclusion.............................. 50
-------- 24,075
----------
Distributable net income as determined under section 67,025
651(b)..................................................

Since the amount of the income ($92,400) required to be distributed
currently by the trust exceeds the distributable net income ($67,025) as
computed under section 651(b), the deduction allowable under section
651(a) is limited to the distributable net income of $67,025.
(e) The taxable income of the trust is $7,200 computed as follows:

Rents........................................................ $25,000
Dividends ($50,000 less $50 exclusion)....................... 49,950
Long-term capital gains...................................... 15,000
------------
Gross income............................................. 89,950
Deductions:
Rental expenses................................. $5,000
Trustee's commissions........................... 2,925
Capital gain deduction.......................... 7,500
Distributions to beneficiaries.................. 67,025
Personal exemption.............................. 300
-------- 82,750
----------
Taxable income................................ ......... 7,200

The trust is not allowed a deduction for the portion ($975) of the
trustee's commissions allocable to tax-exempt interest in computing its
taxable income.
(f) In determining the character of the amounts includible in the
gross income of A and B, it is assumed that the trustee elects to
allocate to rents the expenses not directly attributable to a specific
item of income other than the portion ($975) of such expenses allocated
to tax-exempt interest. The allocation of expenses among the items of
income is shown below:

----------------------------------------------------------------------------------------------------------------
Tax-exempt
Rents Dividends interest Total
----------------------------------------------------------------------------------------------------------------
Income for trust accounting purposes................. $25,000 $50,000 $25,000 $100,000
Less:
Rental expenses.................................... 5,000 ............ ............... 5,000
Trustee's commissions.............................. 2,925 ............ 975 3,900
===============
Total deductions................................. 7,925 0 975 8,900
---------------
Character of amounts in the hands of the 17,075 50,000 24,025 \1\ 91,100
beneficiaries.......................................
----------------------------------------------------------------------------------------------------------------
\1\ Distributable net income.

Inasmuch as the income of the trust is to be distributed equally to A
and B, each is deemed to have received one-half of each item of income;
that is, rents of $8,537.50, dividends of $25,000, and tax-exempt
interest of $12,012.50. The dividends of $25,000 allocated to each
beneficiary are to be aggregated with his other dividends (if any) for
purposes of the dividend exclusion provided

[[Page 103]]

by section 116 and the dividend received credit allowed under section
34. Also, each beneficiary is allowed a deduction of $2,500 for
depreciation of rental property attributable to the portion (one-half)
of the income of the trust distributed to him.

[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6712, 29 FR
3655, Mar. 24, 1964]

estates and trusts which may accumulate income or which distribute
corpus