(a) For the purpose of subpart D (section 665 and following), part I, subchapter J, chapter 1 of the Code, the term taxes imposed on the trust means (for any taxable year) the amount of Federal income taxes which are properly allocable to the undistributed portion of the distributable net income. This amount is the difference between the total taxes of the trust for the year and the amount which would have been paid by the trust had all of the distributable net income, as determined under section 643(a), been distributed. Thus, in determining the amount of taxes imposed on the trust for the purposes of subpart D, there is excluded the portion of the taxes paid by the trust which is attributable to items of gross income which are not includible in distributable net income, such as capital gains allocable to corpus. The rule stated in this paragraph may be illustrated by the following example:
(1) Under the terms of a trust which reports on the calendar year basis the income may be accumulated or distributed to A in the discretion of the trustee and capital gains are allocable to corpus. During the taxable year 1954, the trust had income of $20,000 from royalties, long-term capital gains of $10,000, and expenses of $2,000. The trustee in his discretion made a distribution of $10,000 to A. The taxes imposed on the trust for the purposes of this subpart are $2,713, determined as shown below.
(2) The distributable net income of the trust computed under section 643(a) is $18,000 (royalties of $20,000 less expenses of $2,000). The total taxes paid by the trust are $3,787, computed as follows:
| Royalties | $20,000 | |
| Capital gains | 10,000 | |
| Gross income | 30,000 | |
| Deductions: | ||
| Expenses | $2,000 | |
| Distributions to A | 10,000 | |
| Capital gain deduction | 5,000 | |
| Personal exemption | 100 | |
| 17,100 | ||
| Taxable income | 12,900 | |
| Total income taxes | 3,787 | |
(3) The amount of taxes which would have been paid by the trust, had all of the distributable net income ($18,000) of the trust been distributed to A, is $1,074, computed as follows:
| Taxable income of the trust | $12,900 | |
| Less: Undistributed portion of distributable net income ($18,000−$10,000) | 8,000 | |
| Balance of taxable income | 4,900 | |
| Income taxes on $4,900 | 1,074 | |
(4) The amount of taxes imposed on the trust as defined in this paragraph is $2,713, computed as follows:
| Total taxes | $3,787 | |
| Taxes which would have been paid by the trust had all of the distributable net income been distributed | 1,074 | |
| Taxes imposed on the trust as defined in this paragraph | 2,713 |
(b) If in any subsequent year an accumulation distribution is made by the trust which results in a throwback to the taxable year, the taxes of the taxable year allocable to the undistributed portion of distributable net income (the taxes imposed on the trust), after the close of the subsequent year, are the taxes prescribed in paragraph (a) of this section reduced by the taxes of the taxable year allowed as credits to beneficiaries on account of amounts deemed distributed on the last day of the taxable year under section 666. See paragraph (f)(4) of § 1.668(b)-2 for an illustration of the application of this paragraph.
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