26 CFR § 1.666(c)-2A - Illustration of the provisions of section 666 (a), (b), and (c).
The application of the provisions of §§ 1.666(a)–1A, 1.666(b)–1A, and 1.666(c)–1A may be illustrated by the following examples:
Example 1.
(a) A trust created on January 1, 1974, makes accumulation distributions as follows:
1979
$7,000
1980
26,000
For 1974 through 1978, the undistributed portion of distributable net income, taxes imposed on the trust attributable to the undistributed net income, and undistributed net income are as follows:
| Year | Undistributed portion of distributable net income | Taxes imposed on the trust attributable to the undistributed net income | Undistributed net income |
|---|---|---|---|
| 1974 | $12,100 | $3,400 | $8,700 |
| 1975 | 16,100 | 5,200 | 10,900 |
| 1976 | 6,100 | 1,360 | 4,740 |
| 1977 | None | None | None |
| 1978 | 10,100 | 2,640 | 7,460 |
The trust has no undistributed capital gain.
(b) Since the entire amount of the accumulation distribution for 1979 ($7,000) is less than the undistributed net income for 1974 ($8,700), an additional amount of $2,736 (7,000/8,700 × $3,400) is deemed distributed under section 666(c).
(c) In allocating the accumulation distribution for 1980, the amount of undistributed net income for 1974 will reflect the accumulation distribution for 1979. The undistributed net income for 1974 will then be $1,700 and the taxes imposed on the trust for 1974 will be $664, determined as follows:
| Undistributed net income as of the close of 1974 | $8,700 |
|---|---|
| Less: Accumulation distribution (1979) | 7,000 |
| Balance (undistributed net income as of the close of 1979) | 1,700 |
| Taxes imposed on the trust attributable to the undistributed net income as of the close of 1979 (1,700/8,700 × $3,400) | 664 |
(d) The accumulation distribution of $26,000 for 1980 is deemed to have been made on the last day of the preceding taxable years of the trust to the extent of $24,800, the total of the undistributed net income for such years, as shown in the tabulation below. In addition, $9,864, the total taxes imposed on the trust attributable to the undistributed net income 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 |
|---|---|---|
| 1974 | $1,700 | $664 |
| 1975 | 10,900 | 5,200 |
| 1976 | 4,740 | 1,360 |
| 1977 | None | None |
| 1978 | 7,460 | 2,640 |
| 1979 | None | None |
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 1974 was accumulated. The distributable net income of the trust for the taxable year 1974 is $20,100 and the income taxes paid by the trust for 1974 attributable to the undistributed net income are $7,260. All of the income for 1975 and 1976 was distributed and in addition the trustee made accumulation distributions within the meaning of section 665(b) of $5,420 for each year.
(b) The undistributed net income of the trust determined under section 665(a) as of the close of 1974, is $12,840, computed as follows:
| Distributable net income | $20,100 |
|---|---|
| Less: Taxes imposed on the trust attributable to the undistributed net income | 7,260 |
| Undistributed net income as of the close of 1974 | 12,840 |
(c) The accumulation distribution of $5,420 made during the taxable year 1975 is deemed under section 666(a) to have been made on December 31, 1974. Since this accumulation distribution is less than the 1974 undistributed net income of $12,840, a portion of the taxes imposed on the trust for 1974 is also deemed under section 666(c) to have been distributed on December 31, 1974. The total amount deemed to have been distributed to X on December 31, 1974 is $8,484, computed as follows:
| Accumulation distribution | $5,420 |
|---|---|
| Taxes deemed distributed (5,420/ 12,840 × $7,260) | 3,064 |
| Total | 8,484 |
(d) After the application of the provisions of subpart D to the accumulation distribution of 1975, the undistributed net income of the trust for 1974 is $7,420, computed as follows:
| Undistributed net income as of the close of 1974 | $12,840 |
|---|---|
| Less: 1975 accumulation distribution deemed distributed on December 31, 1974 (paragraph (c) of this example) | 5,420 |
| Undistributed net income for 1974 as of the close of 1975 | 7,420 |
(e) The taxes imposed on the trust attributable to the undistributed net income for the taxable year 1974, as adjusted to give effect to the 1975 accumulation distribution, amount to $4,196, computed as follows:
| Taxes imposed on the trust attributable to undistributed net income as of the close of 1974 | $7,260 |
|---|---|
| Less: Taxes deemed distributed in 1974 | 3,064 |
| Taxes attributable to the undistributed net income determined as of the close of 1975 | 4,196 |
(f) The accumulation distribution of $5,420 made during the taxable year 1976 is, under section 666(a), deemed a distribution to X on December 31, 1974, within the meaning of section 661(a)(2). Since the accumulation distribution is less than the 1974 adjusted undistributed net income of $7,420, the trust is deemed under section 666(c) also to have distributed on December 31, 1974, a portion of the taxes imposed on the trust for 1974. The total amount deemed to be distributed on December 31, 1974, with respect to the accumulation distribution made in 1976, is $8,484, computed as follows:
| Accumulation distribution | $5,420 |
|---|---|
| Taxes deemed distributed (5,420/ 7,420 × $4,196) | 3,064 |
| Total | 8,484 |
(g) After the application of the provisions of subpart D to the accumulation distribution of 1976, the undistributed net income of the trust for 1974 is $2,000, computed as follows:
| Undistributed net income for 1974 as of the close of 1975 | $7,420 |
|---|---|
| Less: 1976 accumulation distribution deemed distributed on December 31, 1974 (paragraph (f) of this example) | 5,420 |
| Undistributed net income for 1974 as of the close of 1976 | 2,000 |
(h) The taxes imposed on the trust attributable to the undistributed net income of the trust for the taxable year 1974, determined as of the close of the taxable year 1976, amount to $1,132 ($4,196 less $3,064).
[T.D. 7204, 37 FR 17145, Aug. 25, 1972]