CCA 201016073: A trustee's failure to claim the distribution deduction does not shift beneficiary income to the trust

Plain-English summary

Chief Counsel Advice explains the relationship between the trust distribution deduction under section 661 and beneficiary income under section 662. It states that the amount potentially reportable by a beneficiary under section 662 does not change merely because the fiduciary does not claim the allowable section 661 deduction on Form 1041. A properly paid, credited, or required distribution is treated as a distribution of current trust or estate income to the extent of distributable net income allocable to the beneficiary. The advice says that not claiming the deduction could cause the same income to be taxed at both the trust and beneficiary levels, rather than shifting the tax burden to the trust.

Ruling snapshot

• Question: Does a trustee's decision not to claim the section 661 distribution deduction shift the tax liability for a beneficiary's distribution to the trust?
• Outcome: Advice given
• Key authorities: IRC §§ 643(a), 661, and 662

Full text (IRS public release)

ID: CCA_2010032614491121 Number: 201016073
Release Date: 4/23/2010
Office: ----------------
UILC: 661.01-00, 662.00-00

From: ----------------------
Sent: Friday, March 26, 2010 2:49:14 PM
To: ---------------------------------------------
Cc: ------------------------------------------------------------------------ Subject: Informal Chief Counsel Advice

You have requested our guidance regarding practitioner inquiries as to whether a trustee is required to take an income distribution deduction under § 661 of the Internal Revenue Code. These inquiries were based on an assumption that if the trustee chooses not to take the deduction, the result would be to shift the tax liability for distributions made to beneficiaries to the trust. Our response is that the amount potentially reportable in the gross income of the beneficiary under § 662 is unchanged by the amount of the allowable distribution deduction under § 661, even if the fiduciary chooses not to claim the § 661 deduction on the Form 1041, U.S. Income Tax Return for Estates and Trusts. Any distribution to a beneficiary described in § 661 that is properly paid, credited, or required to be distributed is considered a distribution of the trust or estate's current income to the extent of that trust or estate's distributable net income ("DNI"), as described in § 643(a), that is allocable to such beneficiary in the taxable year. Therefore, the effect of a trustee not claiming the distribution deduction would be to subject the same income to taxation at both the trust and beneficiary levels, not to shift the incidence of taxation. The legislative history surrounding the enactment of § 662 states that the effect of limiting the taxation of a beneficiary to his proportionate share of the DNI serves to avoid to the necessity for tracing of income. The House report states that "[i]nstead of determining whether a particular distribution represents amounts of current or accumulated trust income, this revision, broadly speaking, provides that any distribution is considered a distribution of the trust or estate's current income to the extent of its taxable income for the year." Committee on Ways and Means, Report on H.R. 8300 (1954) at 199. Please contact us with any additional questions.