{"data":{"id":"us/26-cfr-1.652-c-4","jurisdiction":"us","citation":"26 CFR 1.652(c)-4","heading":"(c)-4 Illustration of the provisions of sections 651 and 652.","body":"The rules applicable to a trust required to distribute all of its income currently to its beneficiaries may be illustrated by the following example:\nExample.\n(a) Under the terms of a simple trust all of the income is to be distributed equally to beneficiaries A and B and capital gains are to be allocated to corpus. The trust and both beneficiaries file returns on the calendar year basis. No provision is made in the governing instrument with respect to depreciation. During the taxable year 1955, the trust had the following items of income and expense:\nRents $25,000\nDividends of domestic corporations 50,000\nTax-exempt interest on municipal bonds 25,000\nLong-term capital gains 15,000\nTaxes and expenses directly attributable to rents 5,000\nTrustee's commissions allocable to income account 2,600\nTrustee's commissions allocable to principal account 1,300\nDepreciation 5,000\n(b) The income of the trust for fiduciary accounting purposes is $92,400, computed as follows:\nRents $25,000\nDividends 50,000\nTax-exempt interest 25,000\nTotal 100,000\nDeductions:\nExpenses directly attributable to rental income $5,000\nTrustee's commissions allocable to income account 2,600\n7,600\nIncome computed under section 643(b) 92,400\nOne-half ($46,200) of the income of $92,400 is currently distributable to each beneficiary.\n(c) The distributable net income of the trust computed under section 643(a) is $91,100, determined as follows (cents are disregarded in the computation):\nRents $25,000\nDividends 50,000\nTax-exempt interest $25,000\nLess: Expenses allocable thereto (25,000/100,000 × $3,900) 975\n———— 24,025\nTotal 99,025\nDeductions:\nExpenses directly attributable to rental income $5,000\nTrustee's commissions ($3,900 less $975 allocable to tax-exempt interest) 2,925\n———— 7,925\nDistributable net income 91,100\nIn computing the distributable net income of $91,100, the taxable income of the trust was computed with the following modifications: No deductions were allowed for distributions to the beneficiaries and for personal exemption of the trust (section 643(a) (1) and (2)); capital gains were excluded and no deduction under section 1202 (relating to the 50-percent deduction for long-term capital gains) was taken into account (section 643(a)(3)); the tax-exempt interest (as adjusted for expenses) and the dividend exclusion of $50 were included (section 643(a) (5) and (7)). Since all of the income of the trust is required to be currently distributed, no deduction is allowable for depreciation in the absence of specific provisions in the governing instrument providing for the keeping of the trust corpus intact. See section 167(h) and the regulations thereunder.\n(d) The deduction allowable to the trust under section 651(a) for distributions to the beneficiaries is $67,025, computed as follows:\nDistributable net income computed under section 643(a) (see paragraph (c)) $91,100\nLess:\nTax-exempt interest as adjusted $24,025\nDividend exclusion 50\n———— 24,075\nDistributable net income as determined under section 651(b) 67,025\nSince the amount of the income ($92,400) required to be distributed currently by the trust exceeds the distributable net income ($67,025) as computed under section 651(b), the deduction allowable under section 651(a) is limited to the distributable net income of $67,025.\n(e) The taxable income of the trust is $7,200 computed as follows:\nRents $25,000\nDividends ($50,000 less $50 exclusion) 49,950\nLong-term capital gains 15,000\nGross income 89,950\nDeductions:\nRental expenses $5,000\nTrustee's commissions 2,925\nCapital gain deduction 7,500\nDistributions to beneficiaries 67,025\nPersonal exemption 300\n———— 82,750\nTaxable income 7,200\nThe trust is not allowed a deduction for the portion ($975) of the trustee's commissions allocable to tax-exempt interest in computing its taxable income.\n(f) In determining the character of the amounts includible in the gross income of A and B, it is assumed that the trustee elects to allocate to rents the expenses not directly attributable to a specific item of income other than the portion ($975) of such expenses allocated to tax-exempt interest. The allocation of expenses among the items of income is shown below:\nRents Dividends Tax-exempt interest Total\nIncome for trust accounting purposes $25,000 $50,000 $25,000 $100,000\nLess:\nRental expenses 5,000 5,000\nTrustee's commissions 2,925 975 3,900\nTotal deductions 7,925 0 975 8,900\nCharacter of amounts in the hands of the beneficiaries 17,075 50,000 24,025 1 91,100\n1 Distributable net income.\nInasmuch as the income of the trust is to be distributed equally to A and B, each is deemed to have received one-half of each item of income; that is, rents of $8,537.50, dividends of $25,000, and tax-exempt interest of $12,012.50. The dividends of $25,000 allocated to each beneficiary are to be aggregated with his other dividends (if any) for purposes of the dividend exclusion provided by section 116 and the dividend received credit allowed under section 34. Also, each beneficiary is allowed a deduction of $2,500 for depreciation of rental property attributable to the portion (one-half) of the income of the trust distributed to him.","path":["Title 26—Internal Revenue","CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY","SUBCHAPTER A—INCOME TAX","PART 1—INCOME TAXES"],"source_url":"https://www.ecfr.gov/api/versioner/v1/full/2026-08-25/title-26.xml","current_through":"2026-08-25","vintage":"","retrieved_at":"2026-08-27T02:25:11Z","sha256":"df62c3eccbbb1b40b28b2cac8191d7692beea9dc8f93c17426f0e77f5a500ccd","source_id":"us-cfr","stale":true,"prev":"us/26-cfr-1.652-c-3","next":"us/26-cfr-1.661-a-1"},"notice":"GroundRules: Original legal text. Not legal advice."}