[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.643(a)-3]

[Page 53-54]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.643(a)-3  Capital gains and losses.

    (a) Except as provided in Sec. 1.643(a)-6, gains from the sale or 
exchange of capital assets are ordinarily excluded from distributable 
net income, and are not ordinarily considered as paid, credited, or 
required to be distributed to any beneficiary unless they are:
    (1) Allocated to income under the terms of the governing instrument 
or local law by the fiduciary on its books or by notice to the 
beneficiary,
    (2) Allocated to corpus and actually distributed to beneficiaries 
during the taxable year, or
    (3) Utilized (pursuant to the terms of the governing instrument or 
the practice followed by the fiduciary) in determining the amount which 
is distributed or required to be distributed.

However, if capital gains are paid, permanently set aside, or to be used 
for the purposes specified in section 642(c), so that a charitable 
deduction is allowed under that section in respect of the gains, they 
must be included in the computation of distributable net income.
    (b) Losses from the sale or exchange of capital assets are excluded 
in computing distributable net income except to the extent that they 
enter into the determination of any capital gains that are paid, 
credited, or required to be distributed to any beneficiary during the

[[Page 54]]

taxable year (but see Sec. 1.642(h)-1 with respect to capital loss 
carryovers in the year of final termination of an estate or trust).
    (c) The deduction under section 1202 (relating to capital gains) is 
taken into account in computing distributable net income to the extent 
that it is allocable to capital gains which are paid, permanently set 
aside, or to be used for the purposes specified in section 642(c). See 
the regulations under section 642(c) to determine the extent to which 
the amount so paid, permanently set aside, or to be used consists of 
capital gains. The deduction for capital gains provided in section 1202 
insofar as it is allocable to the remainder of the capital gains is not 
taken into account.
    (d) The application of this section may be illustrated by the 
following examples:

    Example 1. A trust is created to pay the income to A for life, with 
a discretionary power in the trustee to invade principal for A's 
benefit. In the taxable year, $10,000 is realized from the sale of 
securities at a profit, and $10,000 in excess of income is distributed 
to A. The capital gain is not allocated to A by the trustee. During the 
taxable year the trustee received and paid out $5,000 of dividends. No 
other cash was received or on hand during the taxable year. The capital 
gain will not ordinarily be included in distributable net income. 
However, if the trustee follows a regular practice of distributing the 
exact net proceeds of the sale of trust property, capital gains will be 
included in distributable net income.
    Example 2. The result in example 1 would have been the same if the 
trustee had been directed to pay an annuity of $15,000 a year to A 
(instead of being directed to pay the income to A with a discretionary 
power to distribute principal).
    Example 3. The trustee of a trust containing Blackacre and other 
property is directed to hold Blackacre for ten years, and then sell it 
and distribute its proceeds to A. Any capital gain realized from the 
sale of Blackacre will be included in distributable net income.
    Example 4. A trust instrument directs that the income shall be paid 
to A, and that the principal shall be distributed to A when he reaches 
age 35. All capital gains realized in the year of termination will be 
included in distributable net income. (See Sec. 1.641(b)-3 for the 
determination of the year of final termination and the taxability of 
capital gains realized after the terminating event and before final 
distribution.)
    Example 5. If in example 4 the trustee had been directed to 
distribute half of the principal to A when he reached 35, the capital 
gain would be included in distributable net income (and in the 
distribution to A) to the extent the capital gain is allocable to A 
under the governing instrument and local law. Thus, if the trust assets 
consisted entirely of 100 shares of corporation M stock and the trustee 
sold half the shares and distributed the proceeds to A, the entire 
capital gain would normally be considered as allocated to A. On the 
other hand, if the trustee sold all the shares and distributed half the 
proceeds to A, half the capital gain would be considered as allocable to 
A.
    Example 6. If in example 4 the trustee had been directed to pay 
$10,000 to B before making distribution to A, no portion of the capital 
gains would be allocable to B since the distribution to B is a gift of a 
specific sum of money within the meaning of section 663(a)(1).

[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6989, 34 FR 
731, Jan. 17, 1969; T.D. 7357, 40 FR 23742, June 2, 1975]