Code of Federal Regulations Title 26. Internal Revenue § 26.1.643(d)–2 Illustration of the provisions of section 643

(a) The provisions of section 643 may be illustrated by the following example:

Example. (1) Under the terms of the trust instrument, the income of a trust is required to be currently distributed to W during her life. Capital gains are allocable to corpus and all expenses are charges against corpus. During the taxable year the trust has the following items of income and expenses:

(2) The “income” of the trust determined under section 643(b) which is currently distributable to W is $50,000, consisting of dividends of $30,000, taxable interest of $10,000, and tax-exempt interest of $10,000. The trustee's commissions and miscellaneous expenses allocable to tax-exempt interest amount to $1,000 (10,000/50,000 x $5,000).

(3) The “distributable net income” determined under section 643(a) amounts to $45,000, computed as follows:

In determining the distributable net income of $45,000, the taxable income of the trust is computed with the following modifications:  No deductions are allowed for distributions to W and for personal exemption of the trust (section 643(a)(1) and (2));  capital gains allocable to corpus are excluded and the deduction allowable under section 1202 is not taken into account (section 643(a)(3)):  the extraordinary dividends allocated to corpus by the trustee in good faith are excluded (sections 643(a)(4));  and the tax-exempt interest (as adjusted for expenses) and the dividend exclusion of $50 are included (section 643(a)(5) and (7)).

(b) See paragraph (c) of the example in § 1.661(c)–2 for the computation of distributable net income where there is a charitable contributions deduction.