[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: 26CFR1.662(b)-2]

[Page 109-110]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.662(b)-2  Character of amounts; when charitable contributions 
are made.

    When a charitable contribution is made, the principles contained in 
Sec. Sec. 1.652(b)-1 and 1.662(b)-1 generally apply. However, before 
the allocation of other deductions among the items of distributable net 
income, the charitable contributions deduction allowed under section 
642(c) is (in the absence of specific allocation under the terms of the 
governing instrument or the requirement under local law of a different 
allocation) allocated among the classes of income entering into the 
computation of estate or trust income in accordance with the rules set 
forth in paragraph (b) of Sec. 1.643(a)-5. In the application of the 
preceding sentence, for the purpose of allocating items of income and 
deductions to beneficiaries to whom income is required to be distributed 
currently, the amount of the charitable contributions deduction is 
disregarded to the extent that it exceeds the income of the trust for 
the taxable year reduced by amounts for the taxable year required to be 
distributed currently. The application of this section may be 
illustrated by the following examples (of which example (1) is 
illustrative of the preceding sentence):

    Example 1. (a) A trust instrument provides that $30,000 of its 
income must be distributed currently to A, and the balance may either be 
distributed to B, distributed to a designated charity, or accumulated. 
Accumulated income may be distributed to B and to the charity. The trust 
for its taxable year has $40,000 of taxable interest and $10,000 of tax-
exempt income, with no expenses. The trustee distributed $30,000 to A, 
$50,000 to charity X, and $10,000 to B.
    (b) Distributable net income for the purpose of determining the 
character of the distribution to A is $30,000 (the charitable 
contributions deduction, for this purpose, being taken into account only 
to the extent of $20,000, the difference between the income of the trust 
for the taxable year, $50,000, and the amount required to be distributed 
currently, $30,000).

[[Page 110]]

    (c) The charitable contributions deduction taken into account, 
$20,000, is allocated proportionately to the items of income of the 
trust, $16,000 to taxable interest and $4,000 to tax-exempt income.
    (d) Under section 662(a)(1), the amount of income required to be 
distributed currently to A is $30,000, which consists of the balance of 
these items, $24,000 of taxable interest and $6,000 of tax-exempt 
income.
    (e) In determining the amount to be included in the gross income of 
B under section 662 for the taxable year, however, the entire charitable 
contributions deduction is taken into account, with the result that 
there is no distributable net income and therefore no amount to be 
included in gross income.
    (f) See subpart D (section 665 and following), part I, subchapter J, 
chapter 1 of the Code for application of the throwback provisions to the 
distribution made to B.
    Example 2. The net income of a trust is payable to A for life, with 
the remainder to a charitable organization. Under the terms of the trust 
instrument and local law capital gains are added to corpus. During the 
taxable year the trust receives dividends of $10,000 and realized a 
long-term capital gain of $10,000, for which a long-term capital gain 
deduction of $5,000 is allowed under section 1202. Since under the trust 
instrument and local law the capital gains are allocated to the 
charitable organization, and since the capital gain deduction is 
directly attributable to the capital gain, the charitable contributions 
deduction and the capital gain deduction are both allocable to the 
capital gain, and dividends in the amount of $10,000 are allocable to A.