United States Code

Subchapter J.-Estates, Trusts, Beneficiaries, and Decedents

PART I.-ESTATES, TRUSTS, AND

BENEFICARIES

SUBPART A.-GENERAL RULES FOR TAXATION OF ESTATES AND TRUSTS

§ 642. Special rules for credits and deductions.

(e) Deduction for depreciation and depletion.

An estate or trust shall be allowed the deduction for depreciation and depletion only to the extent not allowable to beneficiaries under sections 167 (h) and 611(b).

(As amended Oct. 16, 1962, Pub. L. 87-834, § 13 (c) (2) (A), 76 Stat. 1034.)

AMENDMENTS

1962-Subsec. (e). Pub. L. 87-834 substituted a reference to section 167 (h) for a reference to section 167(g). EFFECTIVE DATE OF 1962 AMENDMENT

Amendment of subsec. (e) of this section by Pub. L. 87-834 applicable to taxable years beginning after Dec. 31, 1961, and ending after Oct. 16, 1962, see section 13(g) of Pub. L. 87-834, set out as a note under section 1245 of this title.

§ 643. Definitions applicable to subparts A, B, C, and D. (a) Distributable net income.

For purposes of this part, the term "distributable net income" means, with respect to any taxable year, the taxable income of the estate or trust computed with the following modifications

(6) Income of foreign trust.

In the case of a foreign trust

(A) There shall be included the amounts of gross income from sources without the United States, reduced by any amounts which would be deductible in respect of disbursements allocable to such income but for the provisions of section 265(1) (relating to disallowance of certain deductions).

(B) Gross income from sources within the United States shall be determined without regard to section 894 (relating to income exempt under treaty).

(C) Paragraph (3) shall not apply to a foreign trust created by a United States person. In the case of such a trust, (i) there shall be included gains from the sale or exchange of capital assets, reduced by losses from such sales or exchanges to the extent such losses do not exceed gains from such sales or exchanges, and (ii) the deduction under section 1202 (relating to deduction for excess of capital gains over capital losses) shall not be taken into account.

(d) Foreign trusts created by United States persons. For purposes of this part, the term "foreign trust created by a United States person" means that portion of a foreign trust (as defined in section 7701(a) (31)) attributable to money or property transferred directly or indirectly by a United States person (as defined in section 7701(a) (30)), or under the will of

a decedent who at the date of his death was a United States citizen or resident. (As amended Oct. 16, 1962, Pub. L. 87-834, § 7(a), 76 Stat. 985.)

AMENDMENTS

1962-Subsec. (a)(6). Pub. L. 87-834, § 7(a)(1), substituted "Income of foreign trust" for "Foreign income" in the subsection catchline, designated existing provisions as subpar. (A), and added subpars. (B) and (C). Subsec. (d). Pub. L. 87-834, § 7(a) (2), added subsec. (d).

EFFECTIVE Date of 1962 AMENDMENT

Section 7(1) of Pub. L. 87-834 provided that: "The amendments made by this section [amending this section and sections 665, 666 and 668 of this title and adding section 669 of this title] (other than by subsections (f), (g) and (h) [adding sections 6048, 6677 and 7701(a)(30), (31) of this title]), shall apply with respect to distributions made after December 31, 1962."

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(b) Accumulation distributions of trusts other than certain foreign trusts.

For purposes of this subpart, in the case of a trust (other than a foreign trust created by a United States person), the term "accumulation distribution" for any taxable year of the trust means the amount (if in excess of $2,000) by which the amounts specified in paragraph (2) of section 661 (a) for such taxable year exceed distributable net income reduced by the amounts specified in paragraph (1) of section 661 (a). For purposes of this subsection, the amount specified in paragraph (2) of section 661 (a) shall be determined without regard to section 666 and shall not include

(1) amounts paid, credited, or required to be distributed to a beneficiary as income accumulated before the birth of such beneficiary or before such beneficiary attains the age of 21;

(2) amounts properly paid or credited to a beneficiary to meet the emergency needs of such beneficiary;

(3) amounts properly paid or credited to a beneficiary upon such beneficiary's attaining a specified age or ages if—

(A) the total number of such distributions cannot exceed 4 with respect to such beneficiary, (B) the period between each such distribution to such beneficiary is 4 years or more, and

(4) amounts properly paid or credited to a beneficiary as a final distribution of the trust if such final distribution is made more than 9 years after the date of the last transfer to such trust. (c) Accumulation distribution of certain foreign

trusts.

For purposes of this subpart, in the case of a foreign trust created by a United States person, the term "accumulation distribution" for any taxable

year of the trust means the amount by which the amounts specified in paragraph (2) of section 661(a) for such taxable year exceed distributable net income, reduced by the amounts specified in paragraph (1) of section 661(a). For purposes of this subsection, the amount specified in paragraph (2) of section 661(a) shall be determined without regard to section 666. Any amount paid to a United States person which is from a payor who is not a United States person and which is derived directly or indirectly from a foreign trust created by a United States person shall be deemed in the year of payment to have been directly paid by the foreign trust.

(d) Taxes imposed on the trust.

For purposes of this subpart, the term "taxes imposed on the trust" means the amount of the taxes which are imposed for any taxable year on the trust under this chapter (without regard to this subpart) and which, under regulations prescribed by the Secretary or his delegate, are properly allocable to the undistributed portion of the distributable net income. The amount determined in the preceding sentence shall be reduced by any amount of such taxes allowed, under sections 667 and 668, as a credit to any beneficiary on account of any accumulation distribution determined for any taxable

year.

(e) Preceding taxable year.

For purposes of this subpart, the term "preceding taxable year" does not include any taxable year of the trust to which this part does not apply. In the case of a preceding taxable year with respect to which a trust qualifies (without regard to this subpart) under the provisions of subpart B, for purposes of the application of this subpart to such trust for such taxable year, such trust shall, in accordance with regulations prescribed by the Secretary or his delegate, be treated as a trust to which subpart C applies. (As amended Oct. 16, 1962, Pub. L. 87-834, § 7(b), 76 Stat. 985.)

AMENDMENTS

1962-Subsec. (b). Pub. L. 87-834, § 7(b) (1), substituted "Accumulation distributions of trusts other than certain foreign trusts" for "Accumulation distribution" in the subsection catchline, and inserted "in the case of a trust (other than a foreign trust created by a United States person)," following "purposes of this subpart,".

Subsec. (c). Pub. L. 87-834, § 7(b) (2), added subsec. (c) and redesignated former subsec. (c) as (d).

Subsecs. (d), (e). Pub. L. 87-834, § 7(b) (2), redesignated former subsecs. (c) and (d) as (d) and (e), respectively.

EFFECTIVE DATE OF 1962 AMENDMENT Amendment of section by Pub. L. 87-834 applicable with respect to distributions made after Dec. 31, 1962, see section 7(1) of Pub. L. 87-834, set out as a note under section 643 of this title.

§ 666. Accumulation distribution allocated to 5 preceding years.

(a) Amount allocated.

In the case of a trust (other than a foreign trust created by a United States person) which for a taxable year beginning after December 31, 1953, is subject to subpart C, the amount of the accumulation distribution of such trust for such taxable year shall be deemed to be an amount within the mean

ing of paragraph (2) of section 661 (a) distributed on the last day of each of the 5 preceding taxable years to the extent that such amount exceeds the total of any undistributed net incomes for any taxable years intervening between the taxable year with respect to which the accumulation distribution is determined and such preceding taxable year. The amount deemed to be distributed in any such preceding taxable year under the preceding sentence shall not exceed the undistributed net income of such preceding taxable year. For purposes of this subsection, undistributed net income for each of such 5 preceding taxable years shall be computed without regard to such accumulation distribution and without regard to any accumulation distribution determined for any succeeding taxable year. In the case of a foreign trust created by a United States person, this subsection shall apply to the preceding taxable years of the trust without regard to any provision of the preceding sentences which would (but for this sentence) limit its application to the 5 preceding taxable years.

1962-Subsec. (a). Pub. L. 87-834 inserted words "(other than a foreign trust created by a United States person)" following "In the case of a trust", and inserted sentence making this subsection applicable, in the case of a foreign trust created by a United States person, to the preceding taxable years of the trust without regard to any provision of the preceding sentences of this subsection which would (but for this sentence) limit its application to the 5 preceding taxable years.

§ 668. Treatment of amounts deemed distributed to preceding years.

(a) Amounts treated as received in prior taxable years.

The total of the amounts which are treated under section 666 as having been distributed by the trust in a preceding taxable year shall be included in the income of a beneficiary or beneficiaries of the trust when paid, credited, or required to be distributed to the extent that such total would have been included in the income of such beneficiary or beneficiaries under section 662(a) (2) and (b) if such total had been paid to such beneficiary or beneficiaries on the last day of such preceding taxable year. The portion of such total included under the preceding sentence in the income of any beneficiary shall be based upon the same ratio as determined under the second sentence of section 662 (a) (2) for the taxable year in respect of which the accumulation distribution is determined, except that proper adjustment of such ratio shall be made, in accordance with regulations prescribed by the Secretary or his delegate, for amounts which fall within paragraphs (1) through (4) of section 665 (b). The tax of the beneficiaries attributable to the amounts treated as having been received on the last day of such preceding taxable year of the trust shall not be greater than the aggregate of the taxes attributable to those

1962 Subsec. (a). Pub. L. 87-834 inserted sentence providing "Except as provided in section 669, in the case of a foreign trust created by a United States person the preceding sentence shall not apply to any beneficiary who is a United States person."

EFFECTIVE DATE OF 1962 AMENDMENT

Amendment of section by Pub. L. 87-834 applicable with respect to distributions made after Dec. 31, 1962, see section 7(1) of Pub. L. 87-834, set out as a note under section 643 of this title.

§ 669. Special rules applicable to certain foreign trusts.

(a) Limitation on tax.

(1) General rule.

At the election of a beneficiary who is a United States person (as defined in section 7701(a) (30)) and who satisfies the requirements of subsection (b), the tax attributable to the amounts treated under section 668 (a) as having been received by him from a foreign trust created by a United States person on the last day of a preceding taxable year of the trust shall not be greater than—

(A) the tax determined under the next to the last sentence of section 668 (a), or

(B) the tax determined by multiplying by the number of preceding taxable years of the trust, on the last day of each of which an amount is deemed under section 666 (a) to have been distributed, the average of the increase in tax attributable to recomputing the beneficiary

gross's income for the taxable year and each of his 2 taxable years immediately preceding the year of the accumulation distribution by adding to the income of each of such year an amount determined by dividing the amount required to be included in income under section 668(a) by such number of preceding taxable years of the trust. The recomputation for the taxable year shall be made without regard to the inclusion in income required by section 668 (a) of any amount other than pursuant to this paragraph. (2) Exceptions.

(A) When an accumulation distribution is deemed under section 666 (a) to have been distributed on the last day of less than 3 taxable years of the trust, the taxable years of the beneficiary for which a recomputation is made under subsection (a) (1) (B) shall equal the number of years to which section 666 (a) applies, commencing with the most recent taxable year of the beneficiary.

(B) If a beneficiary was not alive on the last day of each preceding taxable year of the trust with respect to which a distribution is deemed made under section 666(a), paragraph (1)(A)

of this subsection shall not apply. In applying paragraph (1)(B) of this subsection, no recomputation shall be made for a beneficiary for a taxable year for which he was not alive; if he has no preceding taxable year, the recomputation shall be made on the basis of his taxable year without regard to the inclusion in income required by section 668(a) of any amount other than pursuant to paragraph (1) (B).

(3) Effect of prior election.

In computing the limitation on tax under paragraph (1) of this subsection for any beneficiary(A) Subsequent election under paragraph (1)(A).

If an election has been made under paragraph (1) (B) of this subsection, for purposes of a subsequent election under paragraph (1)(A) the income of any year with respect to which an amount is deemed distributed to a beneficiary under section 666 (a) shall include amounts previously deemed distributed to such beneficiary for such year as a result of an accumulation distribution with respect to which an election under paragraph (1) (B) was made.

(B) Subsequent election under paragraph (1)(B). If with respect to an accumulation distribution an election has been made under either paragraph (1)(A) or paragraph (1)(B) of this subsection, or the next to the last sentence of section 668 (a) has applied, for purposes of a subsequent election under paragraph (1)(B) the number of preceding taxable years of the trust with respect to which an amount is deemed distributed to a beneficiary under section 666 (a) shall be determined without regard to any such year with respect to which an amount was previously deemed distributed to such beneficiary.

(b) Information requirement.

The election of a beneficiary to apply the limitations on tax provided in subsection (a) of this section shall not be effective unless the beneficiary at the time of making the election supplies such information with respect to the operation and accounts of the trust, for each taxable year on the last day of which an amount is deemed distributed under section 666 (a), as the Secretary or his delegate may by regulations prescribe. (Added Pub. L. 87–834, § 7 (e), Oct. 16, 1962, 76 Stat. 986.)

EFFECTIVE DATE

Section applicable with respect to distributions made after Dec. 31, 1962, see section 7(1) of Pub. L. 87-834, set out as a note under section 643 of this title.

Subchapter K.-Partners and Partnerships PART II-CONTRIBUTIONS, DISTRIBUTIONS, AND TRANSFERS

SUBPART D.-PROVISIONS COMMON TO OTHER SUBPARTS § 751. Unrealized receivables and inventory items.

For purposes of this subchapter, the term "unrealized receivables" includes, to the extent not previously includible in income under the method of ac

counting used by the partnership, any rights (contractual or otherwise) to payment for

(1) goods delivered, or to be delivered, to the extent the proceeds therefrom would be treated as amounts received from the sale or exchange of property other than a capital asset, or

(2) services rendered, or to be rendered. For purposes of this section and sections 731, 736, and 741, such term also includes section 1245 property (as defined in section 1245 (a) (3)), but only to the extent of the amount which would be treated as gain to which section 1245 (a) would apply if (at the time of the transaction described in this section or section 731, 736, or 741, as the case may be) such property had been sold by the partnership at its fair market value.

(d) Inventory items which have appreciated substantially in value.

(2) Inventory items.

For purposes of this subchapter the term "inventory items" means

(A) property of the partnership of the kind described in section 1221 (1),

(B) any other property of the partnership which, on sale or exchange by the partnership, would be considered property other than a capital asset and other than property described in section 1231,

(C) any other property of the partnership which, if sold or exchanged by the partnership, would result in a gain taxable under subsection (a) of section 1246 (relating to gain on foreign investment company stock), and

(D) any other property held by the partnership which, if held by the selling or distributee partner, would be considered property of the type described in subparagraph (A), (B), or (C).

(As amended Oct. 16, 1962, Pub. L. 87-834, §§ 13 (f) (1), 14(b) (2), 76 Stat. 1035, 1041.)

AMENDMENTS

1962-Subsec. (c). Pub. L. 87-834, § 13 (f) (1), defined "unrealized receivables" for purposes of this section and section 731, 736, and 741, as including section 1245 property, but only to the extent of the amount which would be treated as gain to which section 1245(a) would apply if (at the time of the transaction described in this section or section 731, 736, or 741, as the case may be) such property had been sold by the partnership at its fair market value.

Subsec. (d) (2). Pub. L. 87-834, § 14(b) (2), added subpar. (C), and redesignated former subpar. (C) as (D) and substituted therein "subparagraph (A), (B), or (C)" for "subparagraph (A) or (B)."

EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsec. (c) of this section by Pub. L. 87-834 applicable to taxable years beginning after Dec. 31, 1962, see section 13(g) of Pub. L. 87-834, set out as a note under section 1245 of this title.

Amendment of subsec. (d) (2) of this section by Pub. L. 87-834 applicable with respect to taxable years beginning after Dec. 31, 1962, see section 14 (c) of Pub. L. 87-834, set out as a note under section 1246 of this title.

Subchapter L.-Insurance Companies

Part II. Mutual insurance companies (other than life and certain marine insurance companies and other than fire or flood insurance companies which operate on basis of perpetual policies or premium deposits).

§ 801. Definition of life insurance company. (a) Life insurance company defined.

For purposes of this subtitle, the term "life insurance company" means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or combined with health and accident insurance). or noncancellable contracts of health and accident insurance, if

(1) its life insurance reserves (as defined in subsection (b)), plus

(2) unearned premiums, and unpaid losses (whether or not ascertained), on noncancellable life, health, or accident policies not included in life insurance reserves,

comprise more than 50 percent of its total reserves (as defined in subsection (c)).

(b) Life insurance reserves defined. (1) In general.

For purposes of this part, the term "life insurance reserves" means amounts

(A) which are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and

(B) which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable health and accident insurance contracts (including life insurance or annuity contracts combined with noncancellable health and accident insurance) involving, at the time with respect to which the reserve is computed, life, health, or accident contingencies.

(2) Reserves must be required by law. Except

(A) in the case of policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation,

(B) in the case of policies issued by an organization which meets the requirements of

section 501(c) (9) other than the requirement of subparagraph (B) thereof, and

in addition to the requirements set forth in paragraph (1), life insurance reserves must be required by law.

(3) Assessment companies.

In the case of an assessment life insurance company or association, the term "life insurance reserves" includes

(A) sums actually deposited by such company or association with State or Territorial officers pursuant to law as guaranty or reserve funds, and

(B) any funds maintained, under the charter or articles of incorporation or association (or bylaws approved by a State insurance commissioner) of such company or association, exclusively for the payment of claims arising under certificates of membership or policies issued on the assessment plan and not subject to any other use.

For purposes of this part, the rate of interest assumed in calculating the reserves described in subparagraphs (A) and (B) shall be 3 percent. (4) Deficiency reserves excluded.

The term "life insurance reserves" does not include deficiency reserves. For purposes of this subsection and subsection (c), the deficiency reserve for any contract is that portion of the reserve for such contract equal to the amount (if any) by which—

(A) the present value of the future net premiums required for such contract, exceeds

(B) the present value of the future actual premiums and consideration charged for such contract.

(5) Amount of reserves.

For purposes of this subsection, subsection (a), and subsection (c), the amount of any reserve (or portion thereof) for any taxable year shall be the mean of such reserve (or portion thereof) at the beginning and end of the taxable year.

For purposes of subsection (a), the term "total reserves" means

(1) life insurance reserves,

(2) unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and

(3) all other insurance reserves required by law. The term "total reserves" does not include deficiency reserves (within the meaning of subsection (b) (4)).

(d) Adjustments in reserves for policy loans.

For purposes only of determining under subsection (a) whether or not an insurance company is a life insurance company, the life insurance reserves, and the total reserves, shall each be reduced by an amount equal to the mean of the aggregates, at the beginning and end of the taxable year, of the policy loans outstanding with respect to contracts for which life insurance reserves are maintained.

(e) Guaranteed renewable contracts.

For purposes of this part, guaranteed renewable life, health, and accident insurance shall be treated in the same manner as noncancellable life, health, and accident insurance.

(f) Burial and funeral benefit insurance companies. A burial or funeral benefit insurance company engaged directly in the manufacture of funeral supplies or the performance of funeral services shall not be taxable under this part but shall be taxable under section 821 or section 831.

(g) Contracts with reserves based on segregated

asset accounts.

(1) Definitions.

(A) Annuity contracts include variable annuity contracts.

For purposes of this part, an "annuity contract" includes a contract which provides for the payment of a variable annuity computed on the basis of recognized mortality tables and the investment experience of the company issuing the contract.

(B) Contracts with reserves based on a segregated asset account.

For purposes of this part, a "contract with reserves based on a segregated asset account" is a contract

(i) which provides for the allocation of all or part of the amounts received under the contract to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company, (ii) which provides for the payment of annuities, and

(iii) under which the amounts paid in, or the amount paid as annuities, reflect the investment return and the market value of the segregated asset account.

If a contract ceases to reflect current investment return and current market value, such contract shall not be considered as meeting the requirements of clause (iii) after such cessation. (2) Life insurance reserves.

For purposes of subsection (b) (1) (A) of this section, the reflection of the investment return and the market value of the segregated asset account shall be considered an assumed rate of interest.

(3) Separate accounting.

For purposes of this part, a life insurance company which issues contracts with reserves based on segregated asset accounts shall separately account for the various income, exclusion, deduction, asset, reserve, and other liability items properly attributable to such segregated asset accounts. For such items as are not accounted for directly, separate accounting shall be made

(A) in accordance with the method regularly employed by such company, if such method is reasonable, and

(B) in all other cases, in accordance with regulations prescribed by the Secretary or his delegate.

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