Internal Revenue Service
Revenue Ruling
TaxLinks.com
smRev. Rul. 56-30
1956-1 C.B. 646
Sec. 162
Sec. 641
Sec. 901
Sec. 1441
IRS Headnote
Treatment for Federal income tax purposes of income received by a citizen and resident of the United States who is the beneficiary of a trust created in a foreign country the assets of which are composed of Australian investments and American securities.
Full Text
Rev. Rul. 56-30
Advice has been requested relative to the treatment of income received by a citizen and resident of the United States under the circumstances set forth below.
The trustees on an Australian trust are given the power in their sole and unfettered discretion to pay the income therefrom to the beneficiary, a citizen and resident of the United States. The assets of the trust are composed of Australian investments and American securities. The beneficiary was taxed in Australia on the whole of the income earned on Australian investments although the full amount of income was not paid to him. Since he was a resident of the United States, Australia did not assess a tax on the dividends received on the American stock owned by the trust. The tax on these dividends was deducted at the source and the net amount only was paid to the credit of the trustees and in turn to the beneficiary.
Where the discretionary powers given to the trustee include, expressly or by implication, the right to decide whether to pay or withhold and accumulate the amount which he determines is income, the trust is a discretionary trust.
The rules for determining the net income of the beneficiaries of a distributable trust are given in section 162(b) of the Internal Revenue Code of 1939. The trust is permitted to deduct the amount which is to be currently distributed under the same provision. In contrast, the discretionary trust is permitted to deduct only that portion of the trust income which is properly paid or credited to the beneficiaries within their taxable year. The rules for determining the net income of the beneficiaries of a discretionary trust are given in section 162(c) of the Internal Revenue Code of 1939.
The Commonwealth of Australia Income Tax Assessment Act, 1936-1939, provides in part in Division 6 as follows:
101. For the purposes of this Division, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of this discretion.
In view of the foregoing, the beneficiary should report on his Federal income tax return only the amount which equals the sum of the payments actually or constructively made by the trustees of the Australian trust to or for his benefit. He will not be liable for Federal income tax on income withheld by the trustees and added to the corpus of the trust.
When income is received by a trust from several sources and only a part of such income is properly distributable to a beneficiary, the income of the beneficiary is considered to have been received proportionately from the several sources. See J. Cornelius Rathborne v. Commissioner , 37 B.T.A. 607, affirmed 103 Fed.(2d) 301.
If the standard deduction is not claimed on the return, and if the income taxes paid to Australia are not deducted from adjusted gross income, the beneficiary is entitled to credit against his United States income tax, under the conditions and with the limitations prescribed in section 131 of the Internal Revenue Code of 1939, the income taxes paid or accrued to Australia during the taxable year which are attributable to the trust income reported by him from sources within Australia. See American Chicle Co. v. United States , 316 U.S. 450, Ct. D. 1561, C.B. 1942-1, 161.
Section 39.143-9(b) of Regulations 118 provides that the tax withheld at the source upon fixed or determinable annual or periodical income paid to nonresident alien fiduciaries is deemed to have been paid by the persons ultimately liable for the tax upon such income. Accordingly, if an individual is subject to the taxes imposed by sections 11 and 12 of the Internal Revenue Code of 1939 upon any portion of the income of a foreign trust, the part of the tax withheld at the source from income of the trust which is allocable to the income so taxed to such individual shall be credited against the amount of the income tax computed upon his return. Any excess shall be credited against the income tax then the from the taxpayer and any balance shall be refunded.
In view of the foregoing, the gross amount of dividends received on American securities properly distributable by the trust to the beneficiary should be included in his gross income without the deduction of any amount for tax withheld at the source from such dividends when the dividends were paid to the trust. He may then credit the tax withheld at the source (under the provisions of section 143(d) of the 1939 Code) which is attributable to such dividends reported in his United States income tax return.
The following example illustrates the treatment to be accorded income received by a beneficiary under similar conditions:
A trust created in foreign country A receives the following income during the course of a year:
Interest from foreign country A............. $ 6,000
Dividends from foreign country B............ 3,000
Dividends from the United States............ 1,000
-------
Total....................................... $10,000
From this income, the trust distributes $8,000 to the beneficiary. Then 6,000/10 ,000 x $8,000, or $4,800, is considered interest income from foreign country A; 3,000/10 ,000 x $8,000, or $2,400, is considered dividend income from foreign country B; and 1,000/10,000$x$8,000, or $800, is considered dividend income from the United States.
Assuming that foreign country A imposes a tax of $1,000 on the $6,000 income of the trust from within that foreign country, the tax attributable to income from foreign country A to be considered in computing the credit against the beneficiary's United States income tax will amount to $800 computed as follows:
4,800 ------ x $1,000 = $800 6,000
But note the conditions and limitations on the foreign tax credit in section 131 of the 1939 Code.
Assuming further that the amount of tax withheld from dividends received by the trust from sources within the United States amounts to $300, the portion of tax withheld attributable to the beneficiary's income from sources within the United States will amount to $240, computed as follows:
800 ------ x $300 = $240. 1,000