26 U.S.C. § 643 — Definitions applicable to subparts A, B, C, and D

(a) Distributable net income. For this part, an estate or trust’s “distributable net income” for a taxable year is its taxable income with these changes: (1) Do not take deductions under sections 651 or 661 for distributions. (2) Do not take the section 642(b) personal-exemption deduction. (3) Exclude capital-asset gains allocated to corpus and not paid, credited, or required to be distributed to a beneficiary, and not paid, permanently set aside, or used for section 642(c) purposes. Exclude capital-asset losses except losses used to calculate gains paid, credited, or required to be distributed to a beneficiary. Do not take the section 1202 exclusion into account. (4) For trusts distributing current income only, exclude extraordinary dividends and taxable stock dividends that a fiduciary, acting in good faith, does not pay or credit to a beneficiary because the fiduciary determines under the governing instrument and local law that they belong to corpus. (5) Include section 103 tax-exempt interest, reduced by expenses allocable to that interest that section 265 would disallow. (6) For a foreign trust, include gross income from outside the United States, reduced by expenses allocable to it that section 265(a)(1) would disallow; calculate United States-source gross income without section 894’s treaty exemption; and do not apply paragraph (3). Instead include capital-asset gains less losses from those sales, limited so losses do not exceed gains. (7) The Secretary must issue regulations needed to carry out and prevent avoidance of this part. If section 642(c) allows a deduction, reduce the paragraph (5) and (6) modifications to the extent the section 642(c) amount is treated as consisting of items described there. Without governing-instrument instructions, treat it as the same proportion of each income class as that class bears to all income classes. (b) Income. For this subpart and subparts B, C, and D, “income,” when not preceded by “taxable,” “distributable net,” “undistributed net,” or “gross,” means the estate or trust’s income for the year under its governing instrument and local law. Extraordinary dividends and taxable stock dividends that a good-faith fiduciary determines belong to corpus under those rules are not income. (c) Beneficiary. For this part, “beneficiary” includes an heir, legatee, or devisee. (d) Backup withholding. Unless regulations provide otherwise, for payments subject to section 3406 withholding, this subchapter applies by allocating section 31(c) credits between the estate or trust and beneficiaries according to their shares of the payment; treating each beneficiary receiving a credit as having received that amount from the estate or trust; and allowing the estate or trust a deduction equal to credits allocated to beneficiaries. (e) Property distributed in kind. (1) A beneficiary’s basis in distributed property is the estate’s or trust’s adjusted basis immediately before distribution, adjusted for gain or loss recognized on the distribution. (2) For noncash property, the amount counted under sections 661(a)(2) and 662(a)(2) is the lesser of the beneficiary’s basis under (1) or the property’s fair market value. (3) If an election under this paragraph applies, (2) does not apply; the estate or trust recognizes gain or loss as if it sold the property to the distributee at fair market value; and the amount counted under those sections is fair market value. The election covers every distribution during the year, must be made on the return, and can be revoked only with the Secretary’s consent. (4) This subsection does not apply to a distribution described in section 663(a). (f) Multiple trusts. Regulations may treat two or more trusts as one if they have substantially the same grantors and primary beneficiaries and a principal purpose is avoiding this chapter’s tax. A husband and wife count as one person for this rule. (g) Estimated tax treated as paid by beneficiary. (1) For a trust, the trustee may elect to treat part of the trust’s estimated-tax payment for a year as paid by a beneficiary. It is treated as paid or credited to that beneficiary on the last day of the trust year. For subtitle F, it is not the trust’s estimated payment but is the beneficiary’s estimated payment on January 15 after the year. (2) The election must be made by the 65th day after the trust year ends, as the Secretary prescribes. (3) For a year reasonably expected to be an estate’s last year, “trust” includes the estate and the fiduciary is treated as trustee. (h) Foreign-trust distributions through nominees. An amount paid to a United States person that comes directly or indirectly from a foreign trust whose payor is not the grantor is treated, in the payment year, as paid directly by the foreign trust to that person. (i) Foreign-trust loans. (1) Unless regulations provide otherwise, if a foreign trust directly or indirectly lends cash or marketable securities, or allows use of other trust property, to or by a United States grantor or beneficiary, or to or by another United States person related to that grantor or beneficiary, the loan amount or fair market value of the use is treated as a distribution to the grantor or beneficiary. (2) “Cash” includes foreign currencies and cash equivalents. A person is related if the relationship would disallow losses under section 267 or 707(b); section 267(c)(4) treats family as including family members’ spouses, and regulations decide which grantor or beneficiary applies when there is more than one. “United States person” excludes an entity exempt from this chapter’s tax. A trust treated as making a distribution under this subsection is not treated as a section 651 simple trust. Use of other property is excluded to the extent the trust receives fair market value within a reasonable time. (3) After a loan or use is counted, later transactions concerning the principal, including repayment, satisfaction, cancellation, discharge, or return of property, are disregarded for this title.