Source: https://www.federalregister.gov/articles/2012/04/16/2012-8996/guidance-under-sections-642-and-643-income-ordering-rules
Timestamp: 2016-05-04 01:56:35
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Federal Register | Guidance Under Sections 642 and 643 (Income Ordering Rules)
-22485 (3 pages)
Document Number: 2012-8996
Shorter URL: https://federalregister.gov/a/2012-8996 Related Topics
Guidance Under Sections 642 and 643 (Income Ordering Rules) 5 actions from June 18th, 2008 to December 2011
73 FR 34670
On June 18, 2008, proposed regulations (REG-101258-08) were published in the Federal Register[73 FR 34670]. The proposed regulations contain proposed amendments to the Income Tax Regulations 26 CFR part 1, confirming that a provision in a trust, a will, or a provision of local law that specifically indicates the source out of which amounts are to be paid, permanently set aside, or used for a purpose specified in section 642(c) must have economic effect independent of income tax consequences in order to be respected for Federal tax purposes. If such provision does not have economic effect independent of income tax consequences, income distributed for a purpose specified in section 642(c) will consist of the same proportion of each class of the items of income as the total of each class bears to the total of all classes. The proposed regulations also make conforming changes in the corresponding language in the Income Tax Regulations under section 643(a)(5). The trusts and estates that are the subject of the proposed regulations include, without limitation, charitable lead trusts (CLTs) and trusts and estates making payments or permanently setting aside amounts for a charitable purpose.
The proposed regulations are based on the structure and provisions of Subchapter J (of Chapter 1, Subtitle A, of the Code) as a whole, as well as on an analysis of the existing regulations with their interrelated cross-references. The IRS and Treasury Department believe that the current regulations under §§ 1.642(c)-3(b) and 1.643(a)-5(b) require that a specific provision of the governing instrument or a provision under local law have economic effect independent of income tax consequences in order to be respected for Federal income tax purposes. To make this clearer, the proposed regulations add the principle of economic effect directly to the regulations under sections 642(c) and 643(a), rather than leaving this principle to be reached by cross-reference to other regulations.
Finally, the proposed regulations remove § 1.642(c)-3(b)(4) because the provisions of section 116 referenced therein were repealed by the Tax Reform Act of 1986 (99).
The general rule provided in Subchapter J, which mandates that the tax character of distributions to beneficiaries consists of a pro rata portion of all types of a trust's income, appears in section 652(b) and in several different sections of the regulations under the subchapter. The only regulatory exception to this pro rata rule is for a specific provision in a governing instrument or a provision under local law that provides as to the tax character of distributions to beneficiaries. This exception to the pro rata rule must have the same meaning throughout the Subchapter J regulations. The chain of regulatory references from §§ 1.642(c)-3(b) and 1.643(a)-5(b), detailed in the preamble to the proposed regulations, incorporates into each of those provisions, by cross-reference to § 1.662(b)-2, “the principles contained” in § 1.652(b)-1 and, in turn, § 1.652(b)-2(a) and -2(b), which require a specific provision to have economic effect independent of income tax consequences in order to be respected. The proposed regulations confirm this uniform principle by inserting the terms of §§ 1.652(b)-1 and 1.652(b)-2(a) and -2(b) explicitly into §§ 1.642(c)-3(b) and 1.643(a)-5(b).
1.Revising the heading of paragraph (b) and adding a heading for (b)(1). 2.Revising paragraph (b)(2). 3.Adding a heading to paragraph (b)(3). 4.Removing paragraph (b)(4). The revisions and addition read as follows:
(b) Determination of amounts deductible under section 642(c) and the character of such amounts—(1) Reduction of charitable contributions deduction by amounts not included in gross income.* * *
(3) Other examples.* * *