The provisions of section 661 may be illustrated by the following example:
Example.(a) Under the terms of a trust, which reports on the calendar year basis, $10,000 a year is required to be paid out of income to a designated charity. The balance of the income may, in the trustee's discretion, be accumulated or distributed to beneficiary A. Expenses are allocable against income and the trust instrument requires a reserve for depreciation. During the taxable year 1955 the trustee contributes $10,000 to charity and in his discretion distributes $15,000 of income to A. The trust has the following items of income and expense for the taxable year 1955:
Dividends $10,000
Partially tax-exempt interest 10,000
Fully tax-exempt interest 10,000
Rents 20,000
Rental expenses 2,000
Depreciation of rental property 3,000
Trustee's commissions 5,000(b) The income of the trust for fiduciary accounting purposes is $40,000, computed as follows:
| Dividends | $10,000
| Partially tax-exempt interest | 10,000
| Fully tax-exempt interest | 10,000
| Rents | 20,000
| Total | 50,000
| Less:
| | | Rental expenses | $2,000
| | Depreciation | 3,000
| | Trustee's commissions | 5,000
| | | 10,000
| Income as computed under section 643(b) | 40,000 |
| Rents | | | $20,000
| Dividends | | | 10,000
| Partially tax-exempt interest | | | 10,000
| Fully tax-exempt interest | | $10,000
| | Less:
| | | | Expenses allocable thereto (10,000/50,000 × $5,000) | $1,000
| | | Charitable contributions allocable thereto (10,000/50,000 × $10,000) | 2,000
| | | | | 3,000
| | | | | 7,000
| Total | | | 47,000
| Deductions:
| | | | Rental expenses | | 2,000
| | Depreciation of rental property | | 3,000
| | Trustee's commissions ($5,000 less $1,000 allocated to tax-exempt interest) | | 4,000
| | Charitable contributions ($10,000 less $2,000 allocated to tax-exempt interest) | | 8,000
| | | | | 17,000
| Distributable net income (section 643(a)) | | | 30,000 |
| Rental income
| Taxable dividends
| Excluded dividends
| Partially tax-exempt interest
| Tax-exempt interest
| Total
| Trust income | $20,000 | $9,950 | $50 | $10,000 | $10,000 | $50,000
| Less:
| | | | | | | Charitable contributions | 4,000 | 2,000 | | 2,000 | 2,000 | 10,000
| Rental expenses | 2,000 | | | | | 2,000
| Depreciation | 3,000 | | | | | 3,000
| Trustee's commissions | 4,000 | | | | 1,000 | 5,000
| Total deductions | 13,000 | 2,000 | 0 | 2,000 | 3,000 | 20,000
| Distributable net income | 7,000 | 7,950 | 50 | 8,000 | 7,000 | 30,000
| Amounts deemed distributed under section 661(a) before applying the limitation of section 661(c) | 3,500 | 3,975 | 25 | 4,000 | 3,500 | 15,000 |
| Rental income | $20,000
| Dividends ($10,000 less $50 exclusion) | 9,950
| Partially tax-exempt interest | 10,000
| Gross income | 39,950
| Deductions:
| | Rental expenses | $2,000
| | Depreciation of rental property | 3,000
| | Trustee's commissions | 4,000
| | Charitable contributions | 8,000
| | Distributions to A | 11,475
| | Personal exemption | 100
| | | | 28,575
| Taxable income | 11,375 |
(g) Dividends of $4,000 allocable to A are to be aggregated with his other dividends (if any) for purposes of the dividend exclusion under section 116 and the dividend received credit under section 84.
