- 12 - distributable net income." Sec. 1.652(a)-2(b), Income Tax Regs. If a beneficiary has gross income under subchapter J, the character of the income to the beneficiary is the same as the character would be in the hands of the trust. Sec. 1.662(b)-1, Income Tax Regs. Under the character rule, when a trust earns income from various sources, the income is: treated as consisting of the same proportion of each class of items entering into the computation of distributable net income as the total of each class bears to the total distributable net income of the estate or trust unless the terms of the governing instruments specifically allocate different classes of income to different beneficiaries * * * [Id.] Thus, to determine whether petitioner is subject to income tax on his receipt of the $46,936 distribution, we must first determine whether Trust C had DNI for its taxable year ended February 28, 1985. If Trust C had DNI equal to or greater than $46,936 for its taxable year ended February 28, 1985, then petitioner must include a percentage of the $46,936 distribution in his 1985 gross income, equal to the proportion of Trust C's DNI that consists of taxable items. Respondent determined that the trusts earned income from three sources during the years in question: (1) Interest on municipal bonds, (2) interest on the loans from the trusts to the estate, and (3) interest on the La Playa and Blue Grass mortgages. Petitioner contests respondent's determination; he alleges that Trust C did not have sufficient DNI for the year in issue. Since respondent concedes that the trusts earned $252,408Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Next
Last modified: May 25, 2011