Sec. 1.661(c)-2 Illustration of the provisions of section 661.
The provisions of section 661 may be illustrated by the following example:
Example.
(a) Under the terms of a trust, which reports on the calendar year basis, $10,000 a year is required to be paid out of income to a designated charity. The balance of the income may, in the trustee's discretion, be accumulated or distributed to beneficiary A. Expenses are allocable against income and the trust instrument requires a reserve for depreciation. During the taxable year 1955 the trustee contributes $10,000 to charity and in his discretion distributes $15,000 of income to A. The trust has the following items of income and expense for the taxable year 1955:
Dividends | $10,000 |
Partially tax-exempt interest | 10,000 |
Fully tax-exempt interest | 10,000 |
Rents | 20,000 |
Rental expenses | 2,000 |
Depreciation of rental property | 3,000 |
Trustee's commissions | 5,000 |
(b) The income of the trust for fiduciary accounting purposes is $40,000, computed as follows:
Dividends | $10,000 | |
Partially tax-exempt interest | 10,000 | |
Fully tax-exempt interest | 10,000 | |
Rents | 20,000 | |
Total | 50,000 | |
Less: |
|
|
Rental expenses | $2,000 |
|
Depreciation | 3,000 |
|
Trustee's commissions | 5,000 |
|
| 10,000 | |
Income as computed under section 643(b) | 40,000 | |
(c) The distributable net income of the trust as computed under section 643(a) is $30,000, determined as follows:
Rents |
|
| $20,000 |
Dividends |
|
| 10,000 |
Partially tax-exempt interest |
|
| 10,000 |
Fully tax-exempt interest |
| $10,000 |
|
Less: |
|
|
|
Expenses allocable thereto (10,000/50,000 × $5,000) | $1,000 |
|
|
Charitable contributions allocable thereto (10,000/50,000 × $10,000) | 2,000 |
|
|
|
| 3,000 |
|
|
|
| 7,000 |
Total |
|
| 47,000 |
Deductions: |
|
|
|
Rental expenses |
| 2,000 |
|
Depreciation of rental property |
| 3,000 |
|
Trustee's commissions ($5,000 less $1,000 allocated to tax-exempt interest) |
| 4,000 |
|
Charitable contributions ($10,000 less $2,000 allocated to tax-exempt interest) |
| 8,000 |
|
|
|
| 17,000 |
Distributable net income (section 643(a)) |
|
| 30,000 |
(d) The character of the amounts distributed under section 661(a), determined in accordance with the rules prescribed in sections 1.661(b)-1 and 1.661(b)-2 is shown by the following table (for the purpose of this allocation, it is assumed that the trustee elected to allocate the trustee's commissions to rental income except for the amount required to be allocated to tax-exempt interest):
| Rental income | Taxable dividends | Excluded dividends | Partially tax-exempt interest | Tax-exempt interest | Total |
Trust income | $20,000 | $9,950 | $50 | $10,000 | $10,000 | $50,000 |
Less: |
|
|
|
|
|
|
Charitable contributions | 4,000 | 2,000 |
| 2,000 | 2,000 | 10,000 |
Rental expenses | 2,000 |
|
|
|
| 2,000 |
Depreciation | 3,000 |
|
|
|
| 3,000 |
Trustee's commissions | 4,000 |
|
|
| 1,000 | 5,000 |
Total deductions | 13,000 | 2,000 | 0 | 2,000 | 3,000 | 20,000 |
Distributable net income | 7,000 | 7,950 | 50 | 8,000 | 7,000 | 30,000 |
Amounts deemed distributed under section 661(a) before applying the limitation of section 661(c) | 3,500 | 3,975 | 25 | 4,000 | 3,500 | 15,000 |
In the absence of specific provisions in the trust instrument for the allocation of different classes of income, the charitable contribution is deemed to consist of a pro rata portion of the gross amount of each items of income of the trust (except dividends excluded under section 116) and the trust is deemed to have distributed to A a pro rata portion (one-half) of each item of income included in distributable net income.
(e) The taxable income of the trust is $11,375 computed as follows:
Rental income | $20,000 | |
Dividends ($10,000 less $50 exclusion) | 9,950 | |
Partially tax-exempt interest | 10,000 | |
Gross income | 39,950 | |
Deductions: |
| |
Rental expenses | $2,000 |
|
Depreciation of rental property | 3,000 |
|
Trustee's commissions | 4,000 |
|
Charitable contributions | 8,000 |
|
Distributions to A | 11,475 |
|
Personal exemption | 100 |
|
|
| 28,575 |
Taxable income | 11,375 | |
In computing the taxable income of the trust no deduction is allowable for the portions of the charitable contributions deduction ($2,000) and trustee's commissions ($1,000) which are treated under section 661(b) as attributable to the tax-exempt interest excludable from gross income. Also, of the dividends of $4,000 deemed to have been distributed to A under section 661(a), $25 (25/50ths of $50) is deemed to have been distributed from the excluded dividends and is not an allowable deduction to the trust. Accordingly, the deduction allowable under section 661 is deemed to be composed of $3,500 rental income, $3,975 of dividends, and $4,000 partially tax-exempt interest. No deduction is allowable for the portion of tax-exempt interest or for the portion of the excluded dividends deemed to have been distributed to the beneficiary.
(f) The trust is entitled to the credit allowed by section 34 with respect to dividends of $5,975 ($9,950 less $3,975 distributed to A) included in gross income. Also, the trust is allowed the credit provided by section 35 with respect to partially tax-exempt interest of $6,000 ($10,000 less $4,000 deemed distributed to A) included in gross income.
(g) Dividends of $4,000 allocable to A are to be aggregated with his other dividends (if any) for purposes of the dividend exclusion under section 116 and the dividend received credit under section 84.
[Adopted by T.D. 6217, 21 FR 10207, Dec. 20, 1956; republished by T.D. 6500, 25 FR 11814, Nov. 26, 1960.]
