(a) Distributable net income
For purposes of this part, the term "distributable net income"
means, with respect to any taxable year, the taxable income of the
estate or trust computed with the following modifications -
(1) Deduction for distributions
No deduction shall be taken under sections 651 and 661
(relating to additional deductions).
(2) Deduction for personal exemption
No deduction shall be taken under section 642(b) (relating to
deduction for personal exemptions).
(3) Capital gains and losses
Gains from the sale or exchange of capital assets shall be
excluded to the extent that such gains are allocated to corpus
and are not (A) paid, credited, or required to be distributed to
any beneficiary during the taxable year, or (B) paid, permanently
set aside, or to be used for the purposes specified in section
642(c). Losses from the sale or exchange of capital assets shall
be excluded, except to the extent such losses are taken into
account in determining the amount of gains from the sale or
exchange of capital assets which are paid, credited, or required
to be distributed to any beneficiary during the taxable year. The
exclusion under section 1202 shall not be taken into account.
(4) Extraordinary dividends and taxable stock dividends
For purposes only of subpart B (relating to trusts which
distribute current income only), there shall be excluded those
items of gross income constituting extraordinary dividends or
taxable stock dividends which the fiduciary, acting in good
faith, does not pay or credit to any beneficiary by reason of his
determination that such dividends are allocable to corpus under
the terms of the governing instrument and applicable local law.
(5) Tax-exempt interest
There shall be included any tax-exempt interest to which
section 103 applies, reduced by any amounts which would be
deductible in respect of disbursements allocable to such interest
but for the provisions of section 265 (relating to disallowance
of certain deductions).
(6) Income of foreign trust
In the case of a foreign trust -
(A) There shall be included the amounts of gross income from
sources without the United States, reduced by any amounts which
would be deductible in respect of disbursements allocable to
such income but for the provisions of section 265(a)(1)
(relating to disallowance of certain deductions).
(B) Gross income from sources within the United States shall
be determined without regard to section 894 (relating to income
exempt under treaty).
(C) Paragraph (3) shall not apply to a foreign trust. In the
case of such a trust, there shall be included gains from the
sale or exchange of capital assets, reduced by losses from such
sales or exchanges to the extent such losses do not exceed
gains from such sales or exchanges.
(7) Abusive transactions
The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out the purposes of this part,
including regulations to prevent avoidance of such purposes.
If the estate or trust is allowed a deduction under section 642(c),
the amount of the modifications specified in paragraphs (5) and (6)
shall be reduced to the extent that the amount of income which is
paid, permanently set aside, or to be used for the purposes
specified in section 642(c) is deemed to consist of items specified
in those paragraphs. For this purpose, such amount shall (in the
absence of specific provisions in the governing instrument) be
deemed to consist of the same proportion of each class of items of
income of the estate or trust as the total of each class bears to
the total of all classes.
For purposes of this subpart and subparts B, C, and D, the term
"income", when not preceded by the words "taxable", "distributable
net", "undistributed net", or "gross", means the amount of income
of the estate or trust for the taxable year determined under the
terms of the governing instrument and applicable local law. Items
of gross income constituting extraordinary dividends or taxable
stock dividends which the fiduciary, acting in good faith,
determines to be allocable to corpus under the terms of the
governing instrument and applicable local law shall not be
For purposes of this part, the term "beneficiary" includes heir,
(d) Coordination with back-up withholding
Except to the extent otherwise provided in regulations, this
subchapter shall be applied with respect to payments subject to
withholding under section 3406 -
(1) by allocating between the estate or trust and its
beneficiaries any credit allowable under section 31(c) (on the
basis of their respective shares of any such payment taken into
account under this subchapter),
(2) by treating each beneficiary to whom such credit is
allocated as if an amount equal to such credit has been paid to
him by the estate or trust, and
(3) by allowing the estate or trust a deduction in an amount
equal to the credit so allocated to beneficiaries.
(e) Treatment of property distributed in kind
(1) Basis of beneficiary
The basis of any property received by a beneficiary in a
distribution from an estate or trust shall be -
(A) the adjusted basis of such property in the hands of the
estate or trust immediately before the distribution, adjusted
(B) any gain or loss recognized to the estate or trust on the
(2) Amount of distribution
In the case of any distribution of property (other than cash),
the amount taken into account under sections 661(a)(2) and
662(a)(2) shall be the lesser of -
(A) the basis of such property in the hands of the
beneficiary (as determined under paragraph (1)), or
(B) the fair market value of such property.
(3) Election to recognize gain
(A) In general
In the case of any distribution of property (other than cash)
to which an election under this paragraph applies -
(i) paragraph (2) shall not apply,
(ii) gain or loss shall be recognized by the estate or
trust in the same manner as if such property had been sold to
the distributee at its fair market value, and
(iii) the amount taken into account under sections
661(a)(2) and 662(a)(2) shall be the fair market value of
Any election under this paragraph shall apply to all
distributions made by the estate or trust during a taxable year
and shall be made on the return of such estate or trust for
such taxable year.
Any such election, once made, may be revoked only with the
consent of the Secretary.
(4) Exception for distributions described in section 663(a)
This subsection shall not apply to any distribution described
in section 663(a).
(f) Treatment of multiple trusts
For purposes of this subchapter, under regulations prescribed by
the Secretary, 2 or more trusts shall be treated as 1 trust if -
(1) such trusts have substantially the same grantor or grantors
and substantially the same primary beneficiary or beneficiaries,
(2) a principal purpose of such trusts is the avoidance of the
tax imposed by this chapter.
For purposes of the preceding sentence, a husband and wife shall be
treated as 1 person.
(g) Certain payments of estimated tax treated as paid by
(1) In general
In the case of a trust -
(A) the trustee may elect to treat any portion of a payment
of estimated tax made by such trust for any taxable year of the
trust as a payment made by a beneficiary of such trust,
(B) any amount so treated shall be treated as paid or
credited to the beneficiary on the last day of such taxable
(C) for purposes of subtitle F, the amount so treated -
(i) shall not be treated as a payment of estimated tax made
by the trust, but
(ii) shall be treated as a payment of estimated tax made by
such beneficiary on January 15 following the taxable year.
(2) Time for making election
An election under paragraph (1) shall be made on or before the
65th day after the close of the taxable year of the trust and in
such manner as the Secretary may prescribe.
(3) Extension to last year of estate
In the case of a taxable year reasonably expected to be the
last taxable year of an estate -
(A) any reference in this subsection to a trust shall be
treated as including a reference to an estate, and
(B) the fiduciary of the estate shall be treated as the
(h) Distributions by certain foreign trusts through nominees
For purposes of this part, any amount paid to a United States
person which is derived directly or indirectly from a foreign trust
of which the payor is not the grantor shall be deemed in the year
of payment to have been directly paid by the foreign trust to such
United States person.
(i) Loans from foreign trusts
For purposes of subparts B, C, and D -
(1) General rule
Except as provided in regulations, if a foreign trust makes a
loan of cash or marketable securities (or permits the use of any
other trust property) directly or indirectly to or by -
(A) any grantor or beneficiary of such trust who is a United
States person, or
(B) any United States person not described in subparagraph
(A) who is related to such grantor or beneficiary,
the amount of such loan (or the fair market value of the use of
such property) shall be treated as a distribution by such trust
to such grantor or beneficiary (as the case may be).
(2) Definitions and special rules
For purposes of this subsection -
The term "cash" includes foreign currencies and cash
(B) Related person
(i) In general
A person is related to another person if the relationship
between such persons would result in a disallowance of losses
under section 267 or 707(b). In applying section 267 for
purposes of the preceding sentence, section 267(c)(4) shall
be applied as if the family of an individual includes the
spouses of the members of the family.
If any person described in paragraph (1)(B) is related to
more than one person, the grantor or beneficiary to whom the
treatment under this subsection applies shall be determined
under regulations prescribed by the Secretary.
(C) Exclusion of tax-exempts
The term "United States person" does not include any entity
exempt from tax under this chapter.
(D) Trust not treated as simple trust
Any trust which is treated under this subsection as making a
distribution shall be treated as not described in section 651.
(E) Exception for compensated use of property
In the case of the use of any trust property other than a
loan of cash or marketable securities, paragraph (1) shall not
apply to the extent that the trust is paid the fair market
value of such use within a reasonable period of time of such
(3) Subsequent transactions
If any loan (or use of property) is taken into account under
paragraph (1), any subsequent transaction between the trust and
the original borrower regarding the principal of the loan (by way
of complete or partial repayment, satisfaction, cancellation,
discharge, or otherwise) or the return of such property shall be
disregarded for purposes of this title.