#### § 1.584-2 Income of participants in common trust fund.

(a) Each participant in a common trust fund is required to include in computing its taxable income for its taxable year within which or with which the taxable year of the fund ends, whether or not distributed and whether or not distributable:

(1) Its proportionate share of short-term capital gains and losses, computed as provided in § 1.584-3;

(2) Its proportionate share of long-term capital gains and losses, computed as provided in § 1.584-3; and

(3) Its proportionate share of the ordinary taxable income or the ordinary net loss of the common trust fund, computed as provided in § 1.584-3.

(b) Any tax withheld at the source from income of the fund (*e.g.,* under section 1441) is deemed to have been withheld proportionately from the participants to whom such income is allocated.

(c)

(1) The proportionate share of each participant's short-term capital gains and losses, long-term capital gains and losses, ordinary taxable income or ordinary net loss, dividends and interest received, and tax withheld at the source shall be determined under the method of accounting adopted by the bank in accordance with the written plan by which the common trust fund is established and administered, provided such method clearly reflects the income of each participant.

(2) Items of income and deductions shall be allocated to the periods between valuation dates established by the plan within the taxable year in which they were realized. Ordinary taxable income or ordinary net loss, short-term capital gains and losses, long-term capital gains and losses, and tax withheld at the source shall be computed for each period. The participants' proportionate shares of income and losses for each period shall then be determined.

(3) For taxable years beginning on or after September 22, 1980, any amount of income or loss of the common trust fund which is included in the computation of a participant's taxable income for the taxable year shall be treated as income or loss from an unrelated trade or business to the extent that such amount would have been income or loss from an unrelated trade or business if such participant had made directly the investments of the common trust fund.

(4) The provisions of this paragraph may be illustrated by the following example:

# Example.

(i) The plan of a common trust fund provides for quarterly valuation dates and for the computation and the distribution of the income upon a quarterly basis, except that there shall be no distribution of capital gains. The participants are as follows: Trusts A, B, C, and D for the first quarter; Trusts A, B, C, and E for the second quarter; and Trusts A, B, F, and G for the third and fourth quarters, the participants having equal participating interests. As computed upon the quarterly basis, the ordinary taxable income, the short-term capital gain, and the long-term capital loss for the taxable year were as follows:

| | First quarter | Second quarter | Third quarter | Fourth quarter | Total |
| --- | --- | --- | --- | --- | --- |
| Ordinary taxable income | $200 | $300 | $200 | $400 | $1,100 |
| Short-term capital gain | 200 | 100 | 200 | 100 | 600 |
| Long-term capital loss | 100 | 200 | 100 | 200 | 600 |

(ii) The participants' shares of ordinary taxable income are as follows:

| Participant | First quarter | Second quarter | Third quarter | Fourth quarter | Total |
| --- | --- | --- | --- | --- | --- |
| A | $50 | $75 | $50 | $100 | $275 |
| B | 50 | 75 | 50 | 100 | 275 |
| C | 50 | 75 | | | 125 |
| D | 50 | | | | 50 |
| E | | 75 | | | 75 |
| F | | | 50 | 100 | 150 |
| G | | | 50 | 100 | 150 |
| Total | 200 | 300 | 200 | 400 | 1,100 |

Participants' Shares of Ordinary Taxable Income

(iii) The participants' shares of the short-term capital gain are as follows:

| Participant | First quarter | Second quarter | Third quarter | Fourth quarter | Total |
| --- | --- | --- | --- | --- | --- |
| A | $50 | $25 | $50 | $25 | $150 |
| B | 50 | 25 | 50 | 25 | 150 |
| C | 50 | 25 | | | 75 |
| D | 50 | | | | 50 |
| E | | 25 | | | 25 |
| F | | | 50 | 25 | 75 |
| G | | | 50 | 25 | 75 |
| Total | 200 | 100 | 200 | 100 | 600 |

Participants' Shares of Short-Term Capital Gain

(iv) The participants' shares of the long-term capital loss are as follows:

| Participant | First quarter | Second quarter | Third quarter | Fourth quarter | Total |
| --- | --- | --- | --- | --- | --- |
| A | $25 | $50 | $25 | $50 | $150 |
| B | 25 | 50 | 25 | 50 | 150 |
| C | 25 | 50 | | | 75 |
| D | 25 | | | | 25 |
| E | | 50 | | | 50 |
| F | | | 25 | 50 | 75 |
| G | | | 25 | 50 | 75 |
| Total | 100 | 200 | 100 | 200 | 600 |

Participants' Shares of Long-Term Capital Loss

(v) If in the above example the common trust fund also had short-term capital losses and long-term capital gains, the treatment of such gains or losses would be similar to that accorded to the short-term capital gains and long-term capital losses in the above example.

(vi) Assume in the above example that participant Trust A qualified as a trust forming part of a pension, profit sharing, or stock bonus plan under section 401(a). Assume further that 20 percent of the ordinary taxable income of the common trust fund would be unrelated business taxable income (as defined under section 512(a)(1)) if received directly by Trust A. Under paragraph (c)(3), participant Trust A, for purposes of computing its taxable income, must treat its proportionate share of the common trust fund's ordinary taxable income as income from an unrelated trade or business to the extent such amount would have been income from an unrelated trade or business if Trust A had directly made the investments of the common trust fund. Therefore, participant Trust A must take into account 20 percent of its proportionate share of the common trust fund's ordinary taxable income as income from an unrelated trade or business.

(d) The provisions of part I, subchapter J, chapter 1 of the Code, or, as the case may be, the provisions of subchapters D, F, or H of chapter 1 of the Code, are applicable in determining the extent to which each participant's proportionate share of any income or loss of the common trust fund is taxable to the participant, or to a person other than the participant.

[T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 7935, 49 FR 1694, Jan. 13, 1984; T.D. 8662, 61 FR 19546, May 2, 1996]