The provisions of sections 661 and 662 may be illustrated in general by the following example:
Rents | $50,000 | |
Dividends of domestic corporations | 50,000 | |
Tax-exempt interest | 20,000 | |
Partially tax-exempt interest | 10,000 | |
Capital gains (long term) | 20,000 | |
Depreciation of rental property | 10,000 | |
Expenses attributable to rental income | 15,400 | |
Trustee's commissions allocable to income account | 2,800 | |
Trustee's commissions allocable to principal account | 1,100 |
Rents | $50,000 | |
Dividends | 50,000 | |
Tax-exempt interest | 20,000 | |
Partially tax-exempt interest | 10,000 | |
Total | 130,000 | |
Less: | ||
Rental expenses | $15,400 | |
Trustee's commissions allocable to income account | 2,800 | |
———— | 18,200 | |
Income as computed under section 643(b) | 111,800 |
Rents | $50,000 | ||
Dividends | 50,000 | ||
Partially tax-exempt interest | 10,000 | ||
Tax-exempt interest | $20,000 | ||
Less: | |||
Trustee's commissions allocable thereto (20,000/130,000 of $3,900) | $600 | ||
Charitable contributions allocable thereto (20,000/130,000 of $27,950) | 4,300 | ||
————— | 4,900 | ||
————— | 15,100 | ||
Total | 125,100 | ||
Deductions: | |||
Rental expenses | 15,400 | ||
Trustee's commissions ($3,900 less $600 allocated to tax-exempt interest) | 3,300 | ||
Charitable deduction ($27,950 less $4,300 attributable to tax-exempt interest) | 23,650 | ||
————— | 42,350 | ||
Distributable net income | 82,750 |
In computing the distributable net income of $82,750, the taxable income of the trust was computed with the following modifications: No deductions were allowed for distributions to 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)); and the tax-exempt interest (as adjusted for expenses and charitable contributions) and the dividend exclusion of $50 were included (section 643(a) (5) and (7)).
(d) Inasmuch as the distributable net income of $82,750 as determined under section 643(a) is less than the sum of the amounts distributed to W and D of $83,850, the deduction allowable to the trust under section 661(a) is such distributable net income as modified under section 661(c) to exclude therefrom the items of income not included in the gross income of the trust, as follows:
Distributable net income | $82,750 | |
Less: | ||
Tax-exempt interest (as adjusted for expenses and the charitable contributions) | $15,100 | |
Dividend exclusion allowable under section 116 | 50 | |
———— | 15,150 | |
Deduction allowable under section 661(a) | 67,600 |
Rents | Taxable dividends | Excluded dividends | Tax exempt interest | Partially tax exempt interest | Total | |
---|---|---|---|---|---|---|
Trust income | $50,000 | $49,950 | $50 | $20,000 | $10,000 | $130,000 |
Less: | ||||||
Charitable contribution | 10,750 | 10,750 | 4,300 | 2,150 | 27,950 | |
Rental expenses | 15,400 | 15,400 | ||||
Trustee's commissions | 3,300 | 600 | 3,900 | |||
Total deductions | 29,450 | 10,750 | 0 | 4,900 | 2,150 | 47,250 |
Amounts distributable to beneficiaries | 20,550 | 39,200 | 50 | 15,100 | 7,850 | 82,750 |
The character of the charitable contribution is determined by multiplying the total charitable contribution ($27,950) by a fraction consisting of each item of trust income, respectively, over the total trust income, except that no part of the dividends excluded from gross income are deemed included in the charitable contribution. For example, the charitable contribution is deemed to consist of rents of $10,750 (50,000/130,000 × $27,950).
(f) The taxable income of the trust is $9,900 determined as follows:
Rental income | $50,000 | |
Dividends ($50,000 less $50 exclusion) | 49,950 | |
Partially tax-exempt interest | 10,000 | |
Capital gains | 20,000 | |
Gross income | 129,950 | |
Deductions: | ||
Rental expenses | 15,400 | |
Trustee's commissions | 3,300 | |
Charitable contributions | 23,650 | |
Capital gain deduction | 10,000 | |
Distributions to beneficiaries | 67,600 | |
Personal exemption | 100 | |
120,050 | ||
Taxable income | 9,900 |
Rents (20,550/82,750 × $55,900) | $13,882 | |
Dividends (39,250/82,750 × $55,900) | 26,515 | |
Partially tax-exempt interest (7,850/ 82,750 × $55,900) | 5,303 | |
Tax-exempt interest (15,100/82,750 × $55,900) | 10,200 | |
Total | 55,900 |
Accordingly, W will exclude $10,200 of tax-exempt interest from gross income and will receive the credits and exclusion for dividends received and for partially tax-exempt interest provided in sections 34, 116, and 35, respectively, with respect to the dividends and partially tax-exempt interest deemed to have been distributed to her, her share of the dividends being aggregated with other dividends received by her for purposes of the dividend credit and exclusion. In addition, she may deduct a share of the depreciation deduction proportionate to the trust income allocable to her; that is, one-half of the total depreciation deduction, or $5,000.
(h) Inasmuch as the sum of the amount of income required to be distributed currently to W ($55,900) and the other amounts properly paid, credited, or required to be distributed to D ($27,950) exceeds the distributable net income ($82,750) of the trust as determined under section 643(a), D is deemed to have received $26,850 ($82,750 less $55,900) for income tax purposes. The character of the amounts deemed distributed to her is determined as follows:
Rents (20,550/82,750 × $26,850) | $6,668 | |
Dividends (39,250/82,750 × $26,850) | 12,735 | |
Partially tax-exempt interest (7,850/ 82,750 × $26,850) | 2,547 | |
Tax-exempt interest (15,100/82,750 × $26,850) | 4,900 | |
Total | 26,850 |
Accordingly, D will exclude $4,900 of tax-exempt interest from gross income and will receive the credits and exclusion for dividends received and for partially tax-exempt interest provided in sections 34, 116, and 35, respectively, with respect to the dividends and partially tax-exempt interest deemed to have been distributed to her, her share of the dividends being aggregated with other dividends received by her for purposes of the dividend credit and exclusion. In addition, she may deduct a share of the depreciation deduction proportionate to the trust income allocable to her; that is, one-fourth of the total depreciation deduction, or $2,500.
(i) [Reserved]
(j) The remaining $2,500 of the depreciation deduction is allocated to the amount distributed to charity X and is hence non-deductible by the trust, W, or D. (See §1.642(e)-1.)