Reg. § 1.661(c)-1 Limitation on deduction.
An estate or trust is not allowed a deduction under section for any amount which is treated under section as consisting of any item of distributable net income which is not included in the gross income of the estate or trust. For example, if in 1962, a trust, which reports on the calendar year basis, has distributable net income of $20,000, which is deemed to consist of $10,000 of dividends and $10,000 of tax-exempt interest, and distributes $10,000 to beneficiary A, the deduction allowable under section (computed without regard to section ) would amount to $10,000 consisting of $5,000 of dividends and $5,000 of tax-exempt interest. The deduction actually allowable under section as limited by section is $4,975, since no deduction is allowable for the $5,000 of tax-exempt interest and the $25 deemed distributed out of the $50 of dividends excluded under section , items of distributable net income which are not included in the gross income of the estate or trust.
[T.D. 6777, 29 FR 17809, Dec. 16, 1964]