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Capital Gain Distribution

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Capital Gain Distribution Internal Revenue Service, Treasury § 1.665(g)–1A extent such excess deductions are prop- trust had a net long-term capital loss erly allowable in determining taxable in 1970 of $5,000. During the years 1971 income for such year. through 1975, the trust had no capital For purposes of computing the amount gains or capital losses. In 1976, it has a of capital gain under this paragraph, long-term capital gain of $8,000, which no deduction under section 1202, relat- it allocates to corpus and does not dis- ing to deduction for excess of capital tribute to a beneficiary, but has no gains over capital losses, shall be taken taxes attributable to such gain. The into account. The application of this undistributed capital gain for 1976 is subparagraph may be illustrated by the $8,000¥$5,000, or $3,000, even though all following example: or a part of the $5,000 loss was claimed under section 1211 as a deduction in Example. Under the terms of the trust, the years 1970 through 1975. trustee must distribute all income currently and has discretion to distribute capital gain (b) Foreign trusts. Distributable net to A or to allocate it to corpus. During the income for a taxable year of a foreign taxable year 1971 the trust recognized capital trust created by a U.S. person includes gain in the amount of $15,000, and capital capital gains in excess of capital losses losses of $5,000, and had interest income for such year (see § 1.643(a)–6(a)(3)). (after expenses) of $6,000. The trustee distrib- Thus, a foreign trust created by a U.S. uted $8,000 to A, consisting of $6,000 of inter- person can never have any undistrib- est and $2,000 of capital gain. The $2,000 of uted capital gain. gain distributed to A is included in the com- putation of distributable net income under [T.D. 7204, 37 FR 17142, Aug. 25, 1972] § 1.643(a)–3. The balance of the capital gain is not included in distributable net income § 1.665(g)–1A Capital gain distribution. since it is allocated to corpus and not paid, For any taxable year of a trust, the credited, or required to be distributed to any beneficiary. The trust paid taxes of $671, all term capital gain distribution means, to of which are attributable under § 1.665(d)–1A the extent of the undistributed capital to the undistributed capital gain. The gain of the trust, that portion of an ac- amount of undistributed capital gain of the cumulation distribution that exceeds trust for 1971 is therefore $7,329, computed as the amount of such accumulation dis- follows: tribution deemed under section 666(a) Total capital gains .................................................. $15,000 to be undistributed net income of the Less: Capital losses ............................................... 5,000 trust for all preceding taxable years. Gains in excess of losses ...................................... 10,000 See § 1.665(b)–1A for the definition of ‘‘accumulation distribution’’. For any Less: such taxable year the undistributed Amount of capital gain included in distributable net income .......................................................... 2,000 capital gain includes the total undis- Taxes imposed on the trust attributable to tributed capital gain for all years of the undistributed capital gain (see the trust beginning with the first tax- § 1.665(d)–1A) ............................................. 671 able year beginning after December 31, 2,671 1968, in which income (as determined under section 643(b)) is accumulated, Undistributed capital gain ...................................... 7,329 and ending before such taxable year. (2) For purposes of subparagraph (1) See § 1.665(g)–2A for application of the of this paragraph, the term losses for separate share rule. The application of that year includes losses of the trusts this section may be illustrated by the from the sale or exchange of capital as- following example: sets in preceding taxable years not in- Example. A trust on the calendar year basis cluded in the computation of distribut- made the following accumulations. For pur- able net income of any year, reduced poses of this example, the undistributed net by such losses taken into account in a income is the same as income under applica- subsequent preceding taxable year in ble local law. No income was accumulated prior to 1970. computing undistributed capital gain but not reduced by such losses taken Year Undistributed net Undistributed cap- into account in determining the deduc- income ital gain tion under section 1211. See section 1969 ....................... None $10,000 1212(b)(2) and the regulations there- 1970 ....................... $1,000 3,000 under. For example, assume that a 1971 ....................... None 4,000 315 VerDate Mar<15>2010 17:44 Apr 29, 2013 Jkt 229094 PO 00000 Frm 00325 Fmt 8010 Sfmt 8010 Q:\26\26V8.TXT ofr150 PsN: PC150 § 1.665(g)–2A 26 CFR Ch. I (4–1–13 Edition) The trust has distributable net income in terest, foreign income of a foreign 1972 of $2,000 and recognizes capital gains of trust, and excluded dividends, to the $4,500 that are allocable to corpus. On De- extent such amounts are included in cember 31, 1972, the trustee makes a distribu- distributable net income pursuant to tion of $20,000 to the beneficiary. There is an accumulation distribution of $18,000 $20,000 section 643(a) (5), (6), and (7); and distribution less $2,000 d.n.i.) that consists of (ii) The distributable net income of undistributed net income of $1,000 (see the trust is reduced by any deductions § 1.666(a)–1A) and a capital gain distribution allowable under section 661 for of $7,000. The capital gain distribution is amounts paid, credited, or required to computed as follows: be distributed during the taxable year, Accumulation distribution ....................................... $18,000 and the distributable net income of Less: Undistributed net income ............................. 1,000 each separate share is reduced by any Balance .................................................... 17,000 such deduction allocable to that share. (2) The taxes so determined for each Capital gain distribution (undistributed capital gain of the trust for 1972 ($3,000 from 1970 and separate share are then reduced by $4,000 from 1971)) ............................................ 7,000 that portion of the credits against tax allowable to the trust under section Balance (corpus) ..................................... 10,000 642(a) in computing the ‘‘taxes imposed No undistributed capital gain is deemed dis- on the trust’’ that bears the same rela- tributed from 1969 because 1969 is a year tion to the total of such credits that prior to the first year in which income is ac- the items of distributable net income cumulated (1970). The accumulation distribu- allocable to the separate share with re- tion is not deemed to consist of any part of the capital gains recognized in 1972. spect to which the credit is allowed bear to the total of such items of the [T.D. 7204, 37 FR 17142, Aug. 25, 1972] trust. § 1.665(g)–2A Application of separate (c) Allocation of taxes—undistributed share rule. capital gain. The ‘‘taxes imposed on the trust attributable to undistributed cap- (a) In general. If the separate share ital gain’’ are allocated as follows: rule of section 663(c) is applicable for any taxable year of a trust, subpart D (1) There is first allocated to each is applied as if each share were a sepa- separate share that portion of the rate trust except as provided in para- ‘‘taxes imposed on the trust attrib- graph (c) of this section and in utable to undistributed capital gain’’ § 1.668(a)–1A(c). Thus, the amounts of (as defined in § 1.665(d)–1A(c)), com- an ‘‘accumulation distribution’’, ‘‘un- puted before the allowance of any cred- distributed net income’’, ‘‘undistrib- its under section 642(a), that bears the uted capital gain’’, and ‘‘capital gain same relation to the total of such taxes distribution’’ are computed separately that the undistributed capital gain for each share. (prior to the deduction of taxes under (b) Allocation of taxes—undistributed section 665(c)(2)) of the separate share net income. The ‘‘taxes imposed on the bears to the total such undistributed trust attributable to the undistributed capital gain of the trust. net income’’ are allocated as follows: (2) The taxes so determined for each (1) There is first allocated to each separate share are then reduced by separate share that portion of the that portion of the credits against tax ‘‘taxes imposed on the trust attrib- allowable to the trust under section utable to the undistributed net in- 642(a) in computing the ‘‘taxes imposed come’’ (as defined in § 1.665(d)–1A(b)), on the trust’’ that bears the same rela- computed before the allowance of any tion to the total of such credits that credits under section 642(a), that bears the capital gain allocable to the sepa- the same relation to the total of such rate share with respect to which the taxes that the distributable net income credit is allowed bear to the total of of the separate share bears to the dis- such capital gain of the trust. tributable net income of the trust, ad- (d) Termination of a separate share. (1) justed for this purpose as follows: If upon termination of a separate (i) There is excluded from distribut- share, an amount is properly paid, able net income of the trust and of credited, or required to be distributed each separate share any tax-exempt in- by the trust under section 661(a)(2) to a 316 VerDate Mar<15>2010 17:44 Apr 29, 2013 Jkt 229094 PO 00000 Frm 00326 Fmt 8010 Sfmt 8010 Q:\26\26V8.TXT ofr150 PsN: PC150.
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