26 CFR § 1.666(c)-2 - Illustration of the provisions of section 666.
§ 1.666(c)-2 Illustration of the provisions of section 666.
The application of the provisions of §§ 1.666(a)–1, 1.666(b)–1, and 1.666(c)–1 may be illustrated by the following examples:
Example 1.
(a) A trust makes accumulation distributions as follows:
1959
$7,000
1960
25,000
For 1954 through 1958, the undistributed portion of distributable net income taxes imposed on the trust, and undistributed net income are as follows:
| Year | Undistributed portion of distributable net income | Taxes imposed on the trust | Undistributed net income |
|---|---|---|---|
| 1958 | $12,100 | $3,400 | $8,700 |
| 1957 | 16,100 | 5,200 | 10,900 |
| 1956 | 6,100 | 1,360 | 4,740 |
| 1955 | None | None | None |
| 1954 | 10,100 | 2,640 | 7,460 |
(b) Since the entire amount of the accumulation distribution for 1959 ($7,000), determined without regard to the accumulation distribution for 1960, is less than the undistributed net income for 1958 ($8,700), an additional amount of $2,736 (7,000/ 8,700 × $3,400) is likewise deemed distributed under section 666(c).
(c) In allocating the accumulation distribution for 1960, the undistributed net income for 1958 will take into account the accumulation distribution for 1959, and the additional amount of taxes imposed on the trust for 1958 deemed distributed. The undistributed net income for 1958 will then be $1,906; and the taxes imposed on the trust for 1958 will then be $458, determined as follows:
| Undistributed portion of distributable net income as of the close of 1958 | $12,100 | |
|---|---|---|
| Less: | ||
| Accumulation distribution (1959) | $7,000 | |
| Taxes deemed distributed under section 666(c) (7,000/8,700 × $3,400) | 2,736 | |
| 9,736 | ||
| Balance (undistributed portion of distributable net income as of the close of 1959) | 2,364 | |
| Less: Personal exemption | 100 | |
| Balance | 2,264 | |
| Taxes imposed on the trust (income taxes on $2,264) | 458 | |
| Undistributed portion of distributable net income as of the close of 1959 | 2,364 | |
| Less: Income taxes attributable thereto | 458 | |
| Undistributed net income for 1958 as of the close of 1959 | 1,906 | |
(d) The accumulation distribution of $25,000 for 1960 is deemed to have been made on the last day of the 5 preceding taxable years of the trust to the extent of $17,546, the total of the undistributed net income for such years, as shown in the tabulation below. In addition, $7,018, the total taxes imposed on the trust for such years is also deemed to have been distributed on the last day of such years, as shown below:
| Year | Undistributed net income | Taxes imposed on the trust |
|---|---|---|
| 1959 | None | None |
| 1958 | $1,906 | $458 |
| 1957 | 10,900 | 5,200 |
| 1956 | 4,740 | 1,360 |
| 1955 | None | None |
(e) No portion of the 1960 accumulation distribution is deemed made on the last day of 1954 because, as to 1960, 1954 is the sixth preceding taxable year.
Example 2.
(a) Under the terms of a trust instrument, the trustee has discretion to accumulate or distribute the income to X and to invade corpus for the benefit of X. The entire income of the trust is from royalties. Both X and the trust report on the calendar year basis. All of the income for 1954 was accumulated. The distributable net income of the trust for the taxable year 1954 is $20,100 and the income taxes paid by the trust for 1954 with respect to its distributable net income are $7,260. All of the income for 1955 and 1956 was distributed and in addition the trustee made accumulation distributions within the meaning of section 665(b) of $6,420 for each year.
(b) The undistributed net income of the trust determined under section 665(a) as of the close of 1954, is $12,840, computed as follows:
| Distributable net income | $20,100 |
|---|---|
| Less: Taxes imposed on the trust | 7,260 |
| Undistributed net income as of the close of 1954 | 12,840 |
(c) The accumulation distribution of $6,420 made during the taxable year 1955 is deemed under section 666(a) to have been made on December 31, 1954. Since this accumulation distribution is less than the 1954 undistributed net income of $12,840, a portion of the taxes imposed on the trust for 1954 is also deemed under section 666(c) to have been distributed on December 31, 1954. The total amount deemed to have been distributed to X on December 31, 1954, is $10,050, computed as follows:
| Accumulation distribution | $6,420 |
|---|---|
| Taxes deemed distributed (6,420/ 12,840 × $7,260) | 3,630 |
| Total | 10,050 |
(d) After the application of the provisions of subpart D (section 665 and following), part I, subchapter J, chapter 1 of the Code, to the accumulation distribution of 1955, the undistributed portion of the distributable net income of the trust for 1954, is $10,050, and the taxes imposed with respect thereto are $2,623, computed as follows:
| Distributable net income as of the close of 1954 | $20,100 |
|---|---|
| Less: 1955 accumulation distribution and taxes deemed distributed on December 31, 1954 (paragraph (c) of this example) | 10,050 |
| Undistributed portion of the 1954 distributable net income adjusted as of the close of 1955 | 10,050 |
| Less: Personal exemption | 100 |
| Balance | 9,950 |
| Income taxes on $9,950 | 2,623 |
(e) The undistributed net income of the trust for the taxable year 1954, as adjusted to give effect to the 1955 accumulation distribution, is $7,427, computed as follows:
| Undistributed portion of distributable net income as of the close of 1955 | $10,050 |
|---|---|
| Less: Income taxes applicable thereto | 2,623 |
| Undistributed net income determined as of the close of 1955 | 7,427 |
(f) Inasmuch as all of the income of the trust for the taxable year 1955 was distributed to X, the trust had no undistributed net income for that year. Accordingly, the accumulation distribution of $6,420 made during the taxable year 1956 is, under section 666(a), deemed a distribution to X on December 31, 1954, within the meaning of section 661(a)(2). Since this accumulation distribution is less than the 1954 adjusted undistributed net income of $7,427, the trust is deemed under section 666(c) also to have distributed on December 31, 1954, a portion of the taxes imposed on the trust for 1954. The total amount deemed to be distributed on December 31, 1954, with respect to the accumulation distribution made in 1956, is $8,687, computed as follows:
| Accumulation distribution | $6,420 |
|---|---|
| Taxes deemed distributed (6,420/ 7,427 × $2,623) | 2,267 |
| Total | 8,687 |
(g) After the application of the provisions of subpart D to the accumulation distribution of 1956, the undistributed portion of the distributable net income of the trust for 1954, is $1,363, and the taxes imposed on the trust with respect thereto are $253, computed as follows:
| Undistributed portion of distributable net income as of the close of 1955 | $10,050 |
|---|---|
| Less: 1956 accumulation distribution and taxes deemed distributed on December 31, 1954 (paragraph (f) of this example) | 8,687 |
| Undistributed portion of distributable net income as of the close of 1956 | 1,363 |
| Less: Personal exemption | 100 |
| Balance | 1,263 |
| Income taxes on $1,263 | 253 |
(h) The undistributed net income of the trust for the taxable year 1954, determined as of the close of the taxable year 1956, is $1,110 ($1,363 less $253).