26 C.F.R. § 1.652(c)-4
The rules applicable to a trust required to distribute all of its income currently to its beneficiaries may be illustrated by the following example:
Example.
| 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 | |
| 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.
| 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.
| 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.
| 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.
| Rents | Dividends | Tax-exempt interest | Total | |
| 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.
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.
26 C.F.R. §1.652(c)-4