With respect to the treatment of a grantor as the owner of a portion of a trust solely because its income is, or may be, distributed or held or accumulated for future distribution to a beneficiary who is his spouse or applied to the payment of premiums for insurance on the spouse's life, section 677(a) applies to the income of a trust solely during the period of the marriage of the grantor to a beneficiary. In the case of divorce or separation, see sections 71 and 682 and the regulations thereunder.
Dividends$5,000
Capital gain1,000
Expenses allocable to income200
Expenses allocable to corpus100
Since G has a right to receive income he is treated as an owner of a portion of the trust under section 677. Accordingly, he should include the $5,000 of dividends, $200 income expense, and $100 corpus expense in the computation of his taxable income for 1970. He should not include the $1,000 capital gain since that is not attributable to the portion of the trust that he owns. See § 1.671-3(b) . The tax consequences of the capital gain are governed by the provisions of subparts A, B, C, and D (section 641 and following), part I, subchapter J, chapter 1 of the Code. Had the trust sustained a capital loss in any amount the loss would likewise not be included in the computation of G's taxable income, but would also be governed by the provisions of such subparts.
Dividends$10,000
Capital gain2,000
Expenses allocable to income400
Expenses allocable to corpus200
Since the capital gain is held or accumulated for future distributions to G, he is treated under section 677(a)(2) as an owner of a portion of the trust to which the gain is attributable. See § 1.671-3(b) .
Therefore, he must include the capital gain in the computation of his taxable income. (Had the trust sustained a capital loss in any amount, G would likewise include that loss in the computation of his taxable income.) In addition, because of G's discretionary right (whether exercised or not) he is treated as the owner of a portion of the trust which will permit a distribution of income to him of $5,000. Accordingly, G includes dividends of $5,208.33 and income expenses of $208.33 in computing his taxable income, determined in the following manner:
Total dividends | $10,000.00 |
Less: Expenses allocable to income | 400.00 |
Distributable income of the trust | 9,600.00 |
Portion of dividends attributable to G (5,000/9,600 * $10,000) | 5,208.33 |
Portion of income expenses attributable to G (5,000/9,600 * $400) | 208.33 |
Amount of income subject to discretionary right | 5,000.00 |
In accordance with § 1.671-3(c) , G also takes into account $104.17 (5,000/9,600 * $200) of corpus expenses in computing his tax liability. The portion of the dividends and expenses of the trust not attributable to G are governed by the provisions of subparts A through D.
26 C.F.R. §1.677(a)-1