[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: 26CFR1.666(c)-2A] [Page 191-193] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.666(c)-2A Illustration of the provisions of section 666 (a), (b), and (c). The application of the provisions of Sec. Sec. 1.666(a)-1A, 1.666(b)-1A, and 1.666(c)-1A may be illustrated by the following examples: Example 1. (a) A trust created on January 1, 1974, makes accumulation distributions as follows: 1979..............................................................$7,000 1980..............................................................26,000 [[Page 192]] ................................................................ For 1974 through 1978, the undistributed portion of distributable net income, taxes imposed on the trust attributable to the undistributed net income, and undistributed net income are as follows: ---------------------------------------------------------------------------------------------------------------- Taxes imposed on Undistributed the trust Year portion of attributable to Undistributed distributable the undistributed net income net income net income ---------------------------------------------------------------------------------------------------------------- 1974.......................................................... $12,100 $3,400 $8,700 1975.......................................................... 16,100 5,200 10,900 1976.......................................................... 6,100 1,360 4,740 1977.......................................................... None None None 1978.......................................................... 10,100 2,640 7,460 ---------------------------------------------------------------------------------------------------------------- The trust has no undistributed capital gain. (b) Since the entire amount of the accumulation distribution for 1979 ($7,000) is less than the undistributed net income for 1974 ($8,700), an additional amount of $2,736 (7,000/8,700x$3,400) is deemed distributed under section 666(c). (c) In allocating the accumulation distribution for 1980, the amount of undistributed net income for 1974 will reflect the accumulation distribution for 1979. The undistributed net income for 1974 will then be $1,700 and the taxes imposed on the trust for 1974 will be $664, determined as follows: Undistributed net income as of the close of 1974............ $8,700 Less: Accumulation distribution (1979)...................... 7,000 ----------- Balance (undistributed net income as of the close of 1,700 1979).................................................. =========== Taxes imposed on the trust attributable to the undistributed 664 net income as of the close of 1979 (1,700/8,700x$3,400).... (d) The accumulation distribution of $26,000 for 1980 is deemed to have been made on the last day of the preceding taxable years of the trust to the extent of $24,800, the total of the undistributed net income for such years, as shown in the tabulation below. In addition, $9,864, the total taxes imposed on the trust attributable to the undistributed net income for such years is also deemed to have been distributed on the last day of such years, as shown below: ------------------------------------------------------------------------ Undistributed net Taxes imposed on the Year income trust ------------------------------------------------------------------------ 1974........................ $1,700 $664 1975........................ 10,900 5,200 1976........................ 4,740 1,360 1977........................ None None 1978........................ 7,460 2,640 1979........................ None None ------------------------------------------------------------------------ Example 2. (a) Under the terms of a trust instrument, the trustee has discretion to accumulate or distribute the income to X and to invade corpus for the benefit of X. The entire income of the trust is from royalties. Both X and the trust report on the calendar year basis. All of the income for 1974 was accumulated. The distributable net income of the trust for the taxable year 1974 is $20,100 and the income taxes paid by the trust for 1974 attributable to the undistributed net income are $7,260. All of the income for 1975 and 1976 was distributed and in addition the trustee made accumulation distributions within the meaning of section 665(b) of $5,420 for each year. (b) The undistributed net income of the trust determined under section 665(a) as of the close of 1974, is $12,840, computed as follows: Distributable net income.................................... $20,100 Less: Taxes imposed on the trust attributable to the 7,260 undistributed net income................................... ----------- Undistributed net income as of the close of 1974........ 12,840 (c) The accumulation distribution of $5,420 made during the taxable year 1975 is deemed under section 666(a) to have been made on December 31, 1974. Since this accumulation distribution is less than the 1974 undistributed net income of $12,840, a portion of the taxes imposed on the trust for 1974 is also deemed under section 666(c) to have been distributed on December 31, 1974. The total amount deemed to have been distributed to X on December 31, 1974 is $8,484, computed as follows: Accumulation distribution................................... $5,420 Taxes deemed distributed (5,420/ 12,840x$7,260)............. 3,064 ----------- Total................................................... 8,484 (d) After the application of the provisions of subpart D to the accumulation distribution of 1975, the undistributed net income of the trust for 1974 is $7,420, computed as follows: Undistributed net income as of the close of 1974............ $12,840 [[Page 193]] Less: 1975 accumulation distribution deemed distributed on 5,420 December 31, 1974 (paragraph (c) of this example).......... ----------- Undistributed net income for 1974 as of the close of 7,420 1975................................................... (e) The taxes imposed on the trust attributable to the undistributed net income for the taxable year 1974, as adjusted to give effect to the 1975 accumulation distribution, amount to $4,196, computed as follows: Taxes imposed on the trust attributable to undistributed net $7,260 income as of the close of 1974............................. Less: Taxes deemed distributed in 1974...................... 3,064 ----------- Taxes attributable to the undistributed net income 4,196 determined as of the close of 1975..................... (f) The accumulation distribution of $5,420 made during the taxable year 1976 is, under section 666(a), deemed a distribution to X on December 31, 1974, within the meaning of section 661(a)(2). Since the accumulation distribution is less than the 1974 adjusted undistributed net income of $7,420, the trust is deemed under section 666(c) also to have distributed on December 31, 1974, a portion of the taxes imposed on the trust for 1974. The total amount deemed to be distributed on December 31, 1974, with respect to the accumulation distribution made in 1976, is $8,484, computed as follows: Accumulation distribution................................... $5,420 Taxes deemed distributed (5,420/ 7,420x$4,196).............. 3,064 ----------- Total................................................... 8,484 (g) After the application of the provisions of subpart D to the accumulation distribution of 1976, the undistributed net income of the trust for 1974 is $2,000, computed as follows: Undistributed net income for 1974 as of the close of 1975... $7,420 Less: 1976 accumulation distribution deemed distributed on 5,420 December 31, 1974 (paragraph (f) of this example).......... ----------- Undistributed net income for 1974 as of the close of 2,000 1976................................................... (h) The taxes imposed on the trust attributable to the undistributed net income of the trust for the taxable year 1974, determined as of the close of the taxable year 1976, amount to $1,132 ($4,196 less $3,064). [T.D. 7204, 37 FR 17145, Aug. 25, 1972]