§ 1.58-3 Estates and trusts.
(a) In general.
(1) Section 58(c)(1) provides that the sum of the items of tax preference of an estate or trust shall be apportioned between the estate or trust and the beneficiary on the basis of the income of the estate or trust allocable to each. Income for this purpose is the income received or accrued by the trust or estate which is not subject to current taxation either in the hands of the trust or estate or the beneficiary by reason of an item of tax preference. The character of the amounts distributed is determined under section 652(b) or 662(b) and the regulations thereunder.
(2) Additional computations required by reason of excess distributions are to be made in accordance with the principles of sections 665 through 669 and the regulations thereunder.
(3) In the case of a charitable remainder annuity trust (as defined in section 664(d)(1) and § 1.664-2) or a charitable remainder unitrust (as defined in section 664(d)(2) and § 1.664-3), the determination of the income not subject to current taxation by reason of an item of tax preference is to be made as if such trust were generally subject to taxation. Where income of such a trust is not subject to current taxation in accordance with this section and is distributed to a beneficiary in a taxable year subsequent to the taxable year in which the trust received or accrued such income, the items of tax preference relating to such income are apportioned to the beneficiary in such subsequent year (without credit for minimum tax paid by the trust with respect to items of tax preference which are subject to the minimum tax by reason of section 664(c)).
(4) Items of tax preference apportioned to a beneficiary pursuant to this section are to be taken into account by the beneficiary in his taxable year within or with which ends the taxable year of the estate or trust during which it has such items of tax preference.
(5) Where a trust or estate has items of income or deduction which enter into the computation of the excess investment interest item of tax preference, but such items do not result in an item of tax preference at the trust or estate level, each beneficiary must take into account, in computing his excess investment interest, the portion of such items distributed to him. The determination of the portion of such items distributed to each beneficiary is made in accordance with the character rules of section 652(b) or 662(b) and the regulations thereunder.
(6) Where, pursuant to subpart E of part 1 of subchapter J (sections 671 through 678), the grantor of a trust or another person is treated as the owner of any portion of the trust, there shall be included in computing the items of tax preference of such person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent such items are taken into account under section 671 and the regulations thereunder. Any remaining portion of the trust is subject to the provisions of this section.
(b) Examples. The principles of this section may be illustrated by the following examples in each of which it is assumed that none of the distributions are accumulation distributions (see sections 665 through 669 and the regulations thereunder):
Example 1.
Trust A, with one income beneficiary, has the following items of income and deduction without regard to the deduction for distributions:
Based on
the above figures,
the trust has $100,000 of
taxable income without regard to items which enter into
the computation of
excess investment interest and
the deduction for
distributions.
The trust also has $60,000 of
excess investment interests, resulting in $40,000 of distributable
net income. Thus, $60,000 of
the $100,000 of noninvestment income is not subject to current taxation
by reason of the excess investment interest.
(a) If $40,000 is distributed to
the beneficiary,
the beneficiary will normally be
subject to tax on
the full amount received and
the “sheltered” portion of
the income will remain at
the trust level. Thus, none of
the excess investment interest item of
tax preference is apportioned to
the beneficiary.
(b) If the beneficiary receives $65,000 from the trust, the beneficiary is still subject to tax on only $40,000 (the amount of the distributable net income) and thus, is considered to have received $25,000 of business income “sheltered” by excess investment interest. Thus, $25,000 of the $60,000 of excess investment interest of the trust is apportioned to the beneficiary.
Example 2.
Trust B has $150,000 of net section 1201
gain.
(a) If none of the gain is distributed to the beneficiaries, none of the capital gains item of tax preference is apportioned to the beneficiaries.
(b) If all or a part of the gain is distributed to the beneficiaries, a proportionate part of the capital gains item of tax preference is apportioned to the beneficiaries. If any of the beneficiaries are corporations the capital gains item of tax preference is adjusted in the hands of the corporations as provided in § 1.58-2(a).
Example 3.
Trust C has
taxable income of $200,000 computed without regard to
depreciation on section 1250
property and
the deduction for
distributions.
The depreciation on section 1250
property held by
the trust is $160,000.
The trust instrument provides for income to be retained by
the trust in an
amount equal to
the depreciation on
the property determined under
the straight line method (which method has been used for this purpose for
the entire period
the trust has held
the property) which, in this case is equal to $100,000.
The $60,000 excess of
the accelerated
depreciation of $160,000 over
the straight line
amount which would have resulted had
the property been depreciated under that method for
the entire period for which
the trust has held
the property is
an item of
tax preference pursuant to section 57(a)(2). Of
the remaining $100,000 of
net income of
the trust (after
the reserve for
depreciation), 80 percent is distributed to
the beneficiaries. Pursuant to sections 167(h) and 642(e), 80 percent of
the remaining $60,000 of
depreciation deduction (or $48,000) is taken as a
deduction directly by
the beneficiaries and “shelters”
the income received by
the beneficiaries. Thus,
the full $48,000
deduction taken by
the beneficiaries is “excess accelerated
depreciation” on section 1250
property and is
an item of
tax preference in
the hands of
the beneficiaries. None of
the remaining $12,000 of “excess accelerated
depreciation” is apportioned to
the beneficiaries since this
amount “shelters” income retained at
the trust level.
Example 4.
G creates a
trust the ordinary income of which is payable to his adult son. Ten
years from
the date of
the transfer, corpus is to revert to G. G retains no
other right or power which would cause him to be treated as an
owner under subpart E of part 1 of subchapter J (section 671 and
following). Under
the terms of
the trust instrument and applicable local law
capital gains must be applied to corpus. During
the taxable year 1970
the trust has $200,000 income from
dividends and
interest and a net long-term
capital gain of $100,000. Since
the capital gain is held or accumulated for future distribution 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. Therefore, he must include
the capital gain in
the computation of his
taxable income in 1970 and
the capital gain item of
tax preference is treated as being directly received by G. Accordingly, no
adjustment is made to
the trust's
minimum tax exemption
by reason of the capital gain.
Example 5.
For its
taxable year 1971
the trust referred to in
example (4) has
taxable income of $200,000 computed without regard to
depreciation on section 1250
property and
the deduction for
distributions.
The depreciation on section 1250
property held by
the trust is $160,000.
The trust instrument provides for income to be retained by
the trust in an
amount equal to
the depreciation on
the property determined for purposes of
the Federal
income tax. If
the property had been depreciated under
the straight line method for
the entire period for which
the trust held
the property the resulting
depreciation deduction would have been $100,000.
The $60,000 excess is, therefore,
an item of
tax preference pursuant to section 57(a)(2) and
§ 1.57-1(d). Since this
amount of “income” 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 such income is attributable. Therefore, section 671 requires that in computing
the tax liability of
the grantor the income,
deductions, and
credits against
tax of
the trust which are attributable to such portion shall be taken into
account. Thus,
the grantor has received $160,000 of income and is entitled to a
depreciation deduction in
the same
amount.
The $60,000 item of
tax preference resulting from
the excess
depreciation is treated as being directly received by G as he has directly received
the income sheltered by that preference. Accordingly, no
adjustment is made to
the trust's
minimum tax exemption
by reason of such
depreciation.
