(a) Domestic trusts. The term undistributed net income, in the case of a trust (other than a foreign trust created by a U.S. person) means, for any taxable year beginning after December 31, 1968, the distributable net income of the trust for that year (as determined under section 643(a)), less:
(1) The amount of income required to be distributed currently and any other amounts properly paid or credited or required to be distributed to beneficiaries in the taxable year as specified in section 661(a), and
(2) The amount of taxes imposed on the trust attributable to such distributable net income, as defined in § 1.665 (d)-1A. The application of the rule in this paragraph to a taxable year of a trust in which income is accumulated may be illustrated by the following example:
Example.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 1971 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 $2,190 is paid. The undistributed net income of the trust for the taxable year 1971 is $7,910, 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 attributable to the undistributed net income (see § 1.665(d)-1A) | 2,190
| |
| Total | 22,190
| |
| Undistributed net income | 7,910 | |
(b) Foreign trusts. The undistributed net income of a foreign trust created by a U.S. person for any taxable year is the distributable net income of such trust (see § 1.643(a)-6 and the examples set forth in paragraph (b) thereof), less:
(1) The amount of income required to be distributed currently and any other amounts properly paid or credited or required to be distributed to beneficiaries in the taxable year as specified in section 661(a), and
(2) The amount of taxes imposed on such trust by chapter 1 of the Internal Revenue Code, which are attributable to items of income which are required to be included in such distributable net income.
For purposes of subparagraph (2) of this paragraph, the amount of taxes imposed on the trust for any taxable year by chapter 1 of the Internal Revenue Code is the amount of taxes imposed pursuant to section 871 (relating to tax on non-resident alien individuals) which is properly allocable to the undistributed portion of the distributable net income. See § 1.665(d)-1A. The amount of taxes imposed pursuant to section 871 is the difference between the total tax imposed pursuant to that section on the foreign trust created by a U.S. person for the year and the amount which would have been imposed on such trust had all the distributable net income, as determined under section 643(a), been distributed. The application of the rule in this paragraph may be illustrated by the following examples:
Example 1.A trust was created in 1952 under the laws of Country X by the transfer to a trustee in Country X of property by a U.S. person. The entire trust constitutes a foreign trust created by a U.S. person. The governing instrument of the trust provides that $7,000 of income is required to be distributed currently to a U.S. beneficiary and gives the trustee discretion to make additional distributions to the beneficiary. During the taxable year 1973 the trust had income of $10,000 from dividends of a U.S. corporation (on which Federal income taxes of $3,000 were imposed pursuant to section 871 and withheld under section 1441, resulting in the receipt by the trust of cash in the amount of $7,000), $20,000 in capital gains from the sale of stock of a Country Y corporation and $30,000 from dividends of a Country X corporation, none of the gross income of which was derived from sources within the United States. No income taxes were required to be paid to Country X or Country Y in 1973. The trustee did not file a U.S. income tax return for the taxable year 1973. The distributable net income of the trust before distributions to the beneficiary for 1973 is $60,000 ($57,000 of which is cash). During 1973 the trustee made distributions to the U.S. beneficiary equaling one-half of the trust's distributable net income. Thus, the U.S. beneficiary is treated as having had distributed to him $5,000 (composed of $3,500 as a cash distribution and $1,500 as the tax imposed pursuant to section 871 and withheld under section 1441), representing one-half of the income from U.S. sources; $10,000 in cash, representing one-half of the capital gains from the sale of stock of the Country Y corporation; and $15,000 in cash, representing one-half of the income from Country X sources for a total of $30,000. The undistributed net income of the trust at the close of taxable year 1973 is $28,500 computed as follows:
| 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 | 80,000
| |
| (2) Amount of taxes imposed on the trust under chapter 1 of the Code attributable to the undistributed net income (See § 1.665 (d)-1A) $3,000 less $1,500) | $1,500
| |
| Total | $31,500
| |
| Undistributed net income | 28,500 | |
(1) The undistributed net income of the portion of the entire trust which is a foreign trust created by a U.S. person for 1973 is $17,100, computed as follows:
| 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 attributable to the undistributed net income (see § 1.665 (d)-1A) (60% of $1,500) | 900
| |
| Total | 18,900
|
| Undistributed net income | 17,100 |
| Distributable 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 $30,000 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 attributable to the undistributed net income (See § 1.665 (d)-1A) (40% of $1,500) | 600
| |
| Total | 12,600
|
| Undistributed net income | 11,400 |
(c) Effect of prior distributions. The undistributed net income for any year to which an accumulation distribution for a later year may be thrown back will be reduced by accumulation distributions in intervening years that are required to be thrown back to such year. For example, if a trust has undistributed net income for 1975, and an accumulation distribution is made in 1980, there must be taken into account the effect on undistributed net income for 1975 of any accumulation distribution made in 1976, 1977, 1978, or 1979. However, undistributed net income for any year will not be reduced by any distributions in any intervening years that are excluded under section 663(a)(1), relating to gifts, bequests, etc. See paragraph (d) of § 1.666(a)-1A for an illustration of the reduction of undistributed net income for any year by a subsequent accumulation distribution.
(d) Distributions made in taxable years beginning before January 1, 1974. For special rules relating to accumulation distributions of undistributed net income made in taxable years of the trust beginning before January 1, 1974, see § 1.665(b)-2A.
[T.D. 7204, 37 FR 17136, Aug. 25, 1972]