The application of the rule in this paragraph to the first year of a trust in which income is accumulated may be illustrated by the following example:
Example. Assume that under the terms of the trust, $10,000 of income is required to be distributed currently to A and the trustee has discretion to make additional distributions to A. During the taxable year 1954 the trust had distributable net income of $30,100 derived from royalties and the trustee made distributions of $20,000 to A. The taxable income of the trust is $10,000 on which a tax of $2,640 is paid. The undistributed net income of the trust as of the close of the taxable year 1954 is $7,460 computed as follows:
Distributable net income | $30,100 | |
Less: | ||
Income currently distributable to A | $10,000 | |
Other amounts distributed to A | 10,000 | |
Taxes imposed on the trust (see § 1.665(d)-1 ) | 2,640 | |
22,640 | ||
Undistributed net income | 7,460 |
See also paragraphs (e)(1) and (f)(1) of § 1.668(b)-2 for additional illustrations of the application of the rule in this paragraph to the first year of a trust in which income is accumulated.
Distributable net income | $60,000 | |
Less: | ||
(1) Amounts distributed to the beneficiary- | ||
Income currently distributed to the beneficiary | $7,000 | |
Other amounts distributed to the beneficiary | 21,500 | |
Taxes under sec. 871 deemed distributed to the beneficiary | 1,500 | |
Total amounts distributed to the beneficiary | 30,000 | |
(2) Amount of taxes imposed on the trust under chapter 1 of the Code (See § 1.665(d)-1 ) | 1,500 | |
Total | 31,500 | |
Undistributed net income | 28,500 |
Distributable net income (60% of each item of gross income of entire trust): | ||
60% of $10,000 U.S. dividends | $6,000 | |
60% of $20,000 Country X capital gains | 12,000 | |
60% of $30,000 Country X dividends | 18,000 | |
Total | 36,000 | |
Less: | ||
(i) Amounts distributed to the beneficiary- | ||
Income currently distributed to the beneficiary (60% of $7,000) | $4,200 | |
Other amounts distributed to the beneficiary (60% of $21,500) | 12,900 | |
Taxes under sec. 871 deemed distributed to the beneficiary (60% of $1,500) | 900 | |
Total amounts distributed to the beneficiary | 18,000 | |
(ii) Amount of taxes imposed on the trust under chapter 1 of the Code (See § 1.665(d)-1 ) (60% of $1,500) | $900 | |
Total | $18,900 | |
Undistributed net income | 17,100 |
Distributed net income (40% of each item of gross income of entire trust) | ||
40% of $10,000 U.S. dividends | $4,000 | |
40% of $20,000 Country X capital gains | 8,000 | |
40% of Country X dividends | 12,000 | |
Total | 24,000 | |
Less: | ||
(i) Amounts distributed to the beneficiary- | ||
Income currently distributed to the beneficiary (40% of $7,000) | $2,800 | |
Other amounts distributed to the beneficiary (40% of $21,500) | 8,600 | |
Taxes under sec. 871 deemed distributed to the beneficiary (40% of $1,500) | 600 | |
Total amounts distributed to the beneficiary | 12,000 | |
(ii) Amount of taxes imposed on the trust under chapter 1 of the Code (See § 1.665(d)-1 ) (40% of $1,500) | $600 | |
Total | $12,600 | |
Undistributed net income | 11,400 |
26 C.F.R. §1.665(a)-1