[Federal Register Volume 87, Number 62 (Thursday, March 31, 2022)]
[Rules and Regulations]
[Pages 18696-18697]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-06880]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1


Income Taxes

CFR Correction

    This rule is being published by the Office of the Federal Register 
to correct an editorial or technical error that appeared in the most 
recent annual

[[Page 18697]]

revision of the Code of Federal Regulations.

0
In Title 26 of the Code of Federal Regulations, Part 1 (Sec. Sec.  
1.641 to 1.850), revised as of April 1, 2021, in section 1.642(h)-2, 
revise paragraphs (a), (b), and (c) to read as follows:


Sec.  1.642(h)-2  Excess deductions on termination of an estate or 
trust.

    (a) Excess deductions--(1) In general. If, on the termination of an 
estate or trust, the estate or trust has for its last taxable year 
deductions (other than the deductions allowed under section 642(b) 
(relating to the personal exemption) or section 642(c) (relating to 
charitable contributions)) in excess of gross income, the excess 
deductions as determined under paragraph (b) of this section are 
allowed under section 642(h)(2) as items of deduction to the 
beneficiaries succeeding to the property of the estate or trust.
    (2) Treatment by beneficiary. A beneficiary may claim all or part 
of the amount of the deductions provided for in paragraph (a) of this 
section, as determined after application of paragraph (b) of this 
section, before, after, or together with the same character of 
deductions separately allowable to the beneficiary under the Internal 
Revenue Code for the beneficiary's taxable year during which the estate 
or trust terminated as provided in paragraph (c) of this section.
    (b) Character and amount of excess deductions--(1) Character. The 
character and amount of the excess deductions on termination of an 
estate or trust will be determined as provided in this paragraph (b). 
Each deduction comprising the excess deductions under section 642(h)(2) 
retains, in the hands of the beneficiary, its character (specifically, 
as allowable in arriving at adjusted gross income, as a non-
miscellaneous itemized deduction, or as a miscellaneous itemized 
deduction) while in the estate or trust. An item of deduction succeeded 
to by a beneficiary remains subject to any additional applicable 
limitation under the Internal Revenue Code and must be separately 
stated if it could be so limited, as provided in the instructions to 
Form 1041, U.S. Income Tax Return for Estates and Trusts, and the 
Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, 
Credit, etc., or successor forms.
    (2) Amount. The amount of the excess deductions in the final year 
is determined as follows:
    (i) Each deduction directly attributable to a class of income is 
allocated in accordance with the provisions in Sec.  1.652(b)-(a);
    (ii) To the extent of any remaining income after application of 
paragraph (b)(2)(i) of this section, deductions are allocated in 
accordance with the provisions in Sec.  1.652(b)-3(b) and (d); and
    (iii) Deductions remaining after the application of paragraph 
(b)(2)(i) and (ii) of this section comprise the excess deductions on 
termination of the estate or trust. These deductions are allocated to 
the beneficiaries succeeding to the property of the estate of or trust 
in accordance with Sec.  1.642(h)-4.
    (c) Year of termination--(1) In general. The deductions provided 
for in paragraph (a) of this section are allowable only in the taxable 
year of the beneficiary in which or with which the estate or trust 
terminates, whether the year of termination of the estate or trust is 
of normal duration or is a short taxable year.
    (2) Example. Assume that a trust distributes all its assets to B 
and terminates on December 31, Year X. As of that date, it has excess 
deductions of $18,000, all characterized as allowable in arriving at 
adjusted gross income under section 67(e). B, who reports on the 
calendar year basis, could claim the $18,000 as a deduction allowable 
in arriving at B's adjusted gross income for Year X. However, if the 
deduction (when added to other allowable deductions that B claims for 
the year) exceeds B's gross income, the excess may not be carried over 
to any year subsequent to Year X.
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[FR Doc. 2022-06880 Filed 3-30-22; 8:45 am]
BILLING CODE 0099-10-D