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:
Code of Federal Regulations
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 |
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125
|
(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 account |
2,600 |
|
7,600 |
| Income computed under section 643(b)
|
92,400 |
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 ×$3,900) |
975 |
|
———— |
24,025 |
| Total |
|
99,025 |
| Deductions: |
| Expenses directly attributable to rental income |
$5,000 |
| Trustee's commissions ($3,900 less $975 allocable to tax-exempt interest) |
2,925 |
|
———— |
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 paragraph (c)) |
$91,100 |
| Less: |
| Tax-exempt interest as adjusted |
$24,025 |
| Dividend exclusion |
50 |
|
———— |
24,075 |
| Distributable net income as determined under section 651(b)
|
67,025 |
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:
| 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 beneficiaries |
17,075 |
50,000 |
24,025 |
1 91,100 |
|
1 Distributable net income. |
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126
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 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.
Code of Federal Regulations
[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6712, 29 FR 3655, Mar. 24, 1964]