CFR > Title 26 - Internal Revenue > CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY > SUBCHAPTER A—INCOME TAX (Parts 1–19) > PART 1—INCOME TAXES > 1.665(f)-1A—Undistributed capital gain.

1.665(f)-1A—Undistributed capital gain.

(a) Domestic trusts. (1) The term undistributed capital gain means (in the case of a trust other than a foreign trust created by a U.S. person), for any taxable year of the trust beginning after December 31, 1968, the gains in excess of losses for that year from the sale or exchange of capital assets of the trust less:
(i) The amount of such gains that are included in distributable net income under section 643(a)(3) and § 1.643(a)-3.
(ii) The amount of taxes imposed on the trust for such year attributable to such gains, as defined in § 1.665(d)-1 A, and
(iii) In the case of a trust that does not use the alternative method for computing taxes on capital gains of the taxable year, the excess of deductions (other than deductions allowed under section 642(b) relating to personal exemption or section 642(c) relating to charitable contributions) over distributable net income for such year to the extent such excess deductions are properly allowable in determining taxable income for such year.

Code of Federal Regulations

For purposes of computing the amount of capital gain under this paragraph, no deduction under section 1202, relating to deduction for excess of capital gains over capital losses, shall be taken into account. The application of this subparagraph may be illustrated by the following example:

Code of Federal Regulations

Example. Under the terms of the trust, the trustee must distribute all income currently and has discretion to distribute capital gain to A or to allocate it to corpus. During the taxable year 1971 the trust recognized capital gain in the amount of $15,000, and capital losses of $5,000, and had interest income (after expenses) of $6,000. The trustee distributed $8,000 to A, consisting of $6,000 of interest and $2,000 of capital gain. The $2,000 of gain distributed to A is included in the computation of distributable net income under § 1.643(a)-3 . The balance of the capital gain is not included in distributable net income since it is allocated to corpus and not paid, credited, or required to be distributed to any beneficiary. The trust paid taxes of $671, all of which are attributable under § 1.665(d)-1 A to the undistributed capital gain. The amount of undistributed capital gain of the trust for 1971 is therefore $7,329, computed as follows:
Code of Federal Regulations 313
Total capital gains $15,000
Less: Capital losses 5,000
Gains in excess of losses 10,000
Less:
Amount of capital gain included in distributable net income 2,000
Taxes imposed on the trust attributable to the undistributed capital gain (see § 1.665(d)-1 A) 671
2,671
Undistributed capital gain 7,329
(2) For purposes of subparagraph (1) of this paragraph, the term losses for that year includes losses of the trusts from the sale or exchange of capital assets in preceding taxable years not included in the computation of distributable net income of any year, reduced by such losses taken into account in a subsequent preceding taxable year in computing undistributed capital gain but not reduced by such losses taken into account in determining the deduction under section 1211. See section 1212(b)(2) and the regulations thereunder. For example, assume that a trust had a net long-term capital loss in 1970 of $5,000. During the years 1971 through 1975, the trust had no capital gains or capital losses. In 1976, it has a long-term capital gain of $8,000, which it allocates to corpus and does not distribute to a beneficiary, but has no taxes attributable to such gain. The undistributed capital gain for 1976 is $8,000−$5,000, or $3,000, even though all or a part of the $5,000 loss was claimed under section 1211 as a deduction in years 1970 through 1975.
(b) Foreign trusts. Distributable net income for a taxable year of a foreign trust created by a U.S. person includes capital gains in excess of capital losses for such year (see § 1.643(a)-6(a)(3) ). Thus, a foreign trust created by a U.S. person can never have any undistributed capital gain.

Code of Federal Regulations

[T.D. 7204, 37 FR 17142, Aug. 25, 1972]