§ 1.665(a)-0A. Excess distributions by trusts; scope of subpart D.

¶(1) Subpart D (section 665 and following), part I, subchapter J, chapter 1 of the Code as amended by the Tax Reform Act of 1969, is designed to tax the beneficiary of a trust that accumulates, rather than distributes, all or part of its income currently (i.e., an accumulation trust), in most cases, as if the income had been currently distributed to the beneficiary instead of accumulated by the trusts. Accordingly, subpart D provides special rules for the treatment of amounts paid, credited, or required to be distributed by a complex trust (one that is subject to subpart C (section 661 and following) of such part I) in any year in excess of “distributable net income” (as defined in section 643 (a)) for that year. Such an excess distribution is an “accumulation distribution” (as defined in section 665(b)). The special rules of subpart D are generally inapplicable to amounts paid, credited, or required to be distributed by a trust in a taxable year in which it qualifies as a simple trust (one that is subject to subpart B (section 651 and following) of such part I). However, see § 1.665(e)-1A(b) for rules relating to the treatment of a simple trust as a complex trust.

¶(2) An accumulation distribution is deemed to consist of, first, “undistributed net income” (as defined in section 665(a)) of the trust from preceding taxable years, and, after all the undistributed net income for all preceding taxable years has been deemed distributed, “undistributed capital gain” (as defined in section 665(f)) of the trust for all preceding taxable years commencing with the first year such amounts were accumulated. An accumulation distribution of undistributed capital gain is a “capital gain distribution” (as defined in section 665(g)). To the extent an accumulation distribution exceeds the “undistributed net income” and “undistributed capital gain” so determined, it is deemed to consist of corpus.

¶(3) The accumulation distribution is “thrown back” to the earliest “preceding taxable year” of the trust, which, in the case of distributions made for a taxable year beginning after December 31, 1973, from a trust (other than a foreign trust created by a U.S. person), is any taxable year beginning after December 31, 1968. Special transitional rules apply for distributions made in taxable years beginning before January 1, 1974. In the case of a foreign trust created by a U.S. person, a “preceding taxable year” is any year of the trust to which the Code applies.

¶(4) A distribution of undistributed net income (included in an accumulation distribution) and a capital gain distribution will be included in the income of the beneficiary in the year they are actually paid, credited, or required to be distributed to him. The tax on the distribution will be approximately the amount of tax the beneficiary would have paid with respect to the distribution had the income and capital gain been distributed to the beneficiary in the year earned by the trust. An additional amount equal to the “taxes imposed on the trust” for the preceding year is also deemed distributed. To prevent double taxation, however, the beneficiary receives a credit for such taxes.