Reg. § 1.681(a)-2 Limitation on charitable contributions deduction of trusts with trade or business income.
(a) In general No charitable contributions deduction is allowable to a trust under section for any taxable year for amounts allocable to the trust's unrelated business income for the taxable year. For the purpose of section the term unrelated business income of a trust means an amount which would be computed as the trust's unrelated business taxable income under section and the regulations thereunder, if the trust were an organization exempt from tax under section by reason of section . For the purpose of the computation under section , the term unrelated trade or business includes a trade or business carried on by a partnership of which a trust is a member, as well as one carried on by the trust itself. While the charitable contributions deduction under section is entirely disallowed by section for amounts allocable to “unrelated business income”, a partial deduction is nevertheless allowed for such amounts by the operation of section , as illustrated in and of this section. This partial deduction is subject to the percentage limitations applicable to contributions by an individual under section (A) and (B), and is not allowed for amounts set aside or to be used for charitable purposes but not actually paid out during the taxable year. Charitable contributions deductions otherwise allowable under section , , or for contributions to a trust are not disallowed solely because the trust has unrelated business income.
(b) Determination of amounts allocable to unrelated business income In determining the amount for which a charitable contributions deduction would otherwise be allowable under section which are allocable to unrelated business income, and therefore not allowable as a deduction, the following steps are taken:
(1) There is first determined the amount which would be computed as the trust's unrelated business taxable income under section and the regulations thereunder if the trust were an organization exempt from tax under section by reason of section , but without taking the charitable contributions deduction allowed under section .
(2) The amount for which a charitable contributions deduction would otherwise be allowable under section is then allocated between the amount determined in subparagraph (1) of this paragraph and any other income of the trust. Unless the facts clearly indicate to the contrary, the allocation to the amount determined in subparagraph (1) of this paragraph is made on the basis of the ratio (but not in excess of 100 percent) of the amount determined in subparagraph (1) of this paragraph to the taxable income of the trust, determined without the deduction for personal exemption under section , the charitable contributions deduction under section , or the deduction for distributions to beneficiaries under section .
(3) The amount for which a charitable contributions deduction would otherwise be allowable under section which is allocable to unrelated business income as determined in subparagraph (2) of this paragraph, and therefore not allowable as a deduction, is the amount determined in subparagraph (2) of this paragraph reduced by the charitable contributions deduction which would be allowed under section if the trust were an organization exempt from tax under section by reason of section .
(c) Examples
(1) The application of this section may be illustrated by the following examples, in which it is assumed that the Y charity is not a charitable organization qualifying under section (see subparagraph (2) of this paragraph):
Example 1. The X trust has income of $50,000. There is included in this amount a net profit of $31,000 from the operation of a trade or business. The trustee is required to pay half of the trust income to A, an individual, and the balance of the trust income to the Y charity, an organization described in section . The trustee pays each beneficiary $25,000. Under these facts, the unrelated business income of the trust (computed before the charitable contributions deduction which would be allowed under section ) is $30,000 ($31,000 less the deduction of $1,000 allowed by section ). The deduction otherwise allowable under section is $25,000, the amount paid to the Y charity. The portion allocable to the unrelated business income (computed as prescribed in of this section) is $15,000, that is, an amount which bears the same ratio to $25,000 as $30,000 bears to $50,000. The portion allocable to the unrelated business income, and therefore disallowed as a deduction, is $15,000 reduced by $6,000 (20 percent of $30,000, the charitable contributions deduction which would be allowable under section ), or $9,000.
Example 2. Assume the same facts as in example 1, except that the trustee has discretion as to the portion of the trust income to be paid to each beneficiary, and the trustee pays $40,000 to A and $10,000 to the Y charity. The deduction otherwise allowable under section is $10,000. The portion allocable to the unrelated business income computed as prescribed in of this section is $6,000, that is, an amount which bears the same ratio to $10,000 as $30,000 bears to $50,000. Since this amount does not exceed the charitable contributions deduction which would be allowable under section ($6,000, determined as in example 1), no portion of it is disallowed as a deduction.
Example 3. Assume the same facts as in example 1, except that the terms of the trust instrument require the trustee to pay to the Y charity the trust income, if any, derived from the trade or business, and to pay to A all the trust income derived from other sources. The trustee pays $31,000 to the Y charity and $19,000 to A. The deduction otherwise allowable under section is $31,000. Since the entire income from the trade or business is paid to Y charity, the amount allocable to the unrelated business income computed before the charitable contributions deduction under section is $30,000 ($31,000 less the deduction of $1,000 allowed by section ). The amount allocable to the unrelated business income and therefore disallowed as a deduction is $24,000 ($30,000 less $6,000).
Example 4.
(i) Under the terms of the trust, the trustee is required to pay half of the trust income to A, an individual, for his life, and the balance of the trust income to the Y charity, an organization described in section . Capital gains are allocable to corpus and upon A's death the trust is to terminate and the corpus is to be distributed to the Y charity. The trust has taxable income of $50,000 computed without any deduction for personal exemption, charitable contributions, or distributions. The amount of $50,000 includes $10,000 capital gains, $30,000 ($31,000 less the $1,000 deduction allowed under section ) unrelated business income (computed before the charitable contributions deduction which would be allowed under section ) and other income of $9,000. The trustee pays each beneficiary $20,000.
(ii) The deduction otherwise allowable under section is $30,000 ($20,000 paid to Y charity and $10,000 capital gains allocated to corpus and permanently set aside for charitable purposes). The portion allocable to the unrelated business income is $15,000, that is, an amount which bears the same ratio to $20,000 (the amount paid to Y charity) as $30,000 bears to $40,000 ($50,000 less $10,000 capital gains allocable to corpus). The portion allocable to the unrelated business income, and therefore disallowed as a deduction, is $15,000 reduced by $6,000 (the charitable contributions deduction which would be allowable under section ), or $9,000.
(2) If, in the examples in subparagraph (1) of this paragraph, the Y charity were a charitable organization qualifying under section , then the deduction allowable under section would be computed at a rate of 30 percent.
[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6605, 27 FR 8097, Aug. 15, 1962]