The IRS has issued proposed regulations to revise the §643(b) definition of income to take into account changes in the definition of trust accounting income under state laws. The proposed regulations also clarify the situations in which capital gains are included in distributable net income under section 643(a)(3). 

Conforming amendments are made to regulations affecting ordinary trusts, pooled income funds, charitable remainder trusts, trusts that qualify for the gift and estate tax marital deduction, and trusts that are exempt from generation-skipping transfer taxes. This document also provides notice of a public hearing on these proposed regulations.

The proposed definition of income under §1.643(b)-1 will take into account certain state statutory changes to the concepts of income and principal. Trust provisions that depart fundamentally from traditional concepts of income and principal (that is, allocating ordinary income to income and capital gains to principal) will generally continue to be disregarded as they are under current regulations. 

However, amounts allocated between income and principal pursuant to applicable state law will be respected if state law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year, taking into account ordinary income, capital gains, and, in some situations, unrealized appreciation.

The proposed regulations will apply to trusts and estates for taxable years beginning on or after the date the final regulations are published in the Federal Register. 
To view the proposed regulations or to make comments, visit the IRS web site at