ACCUMULATION TRUSTS.

SEC. 701. ACCUMULATION TRUSTS. (a) Revision of Method of Taxing Accumulation Distribution From Trusts.— (1) Section 667 (relating to denial of refund to trusts; authorization of credit to beneficiaries) is amended to read as follows: 90 STAT. 1576 “SEC. 667. TREATMENT OF AMOUNTS DEEMED DISTRIBUTED BY TRUST IN PRECEDING YEARS. “(a) General Rule.— The total of the amounts which are treated under section 666 as having been distributed by a trust in a preceding taxable year shall be included in the income of a beneficiary 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 under section 662(a)(2)(and, with respect to any tax-exempt interest to which section 103 applies, under section 662(b)) if such total had been paid to such beneficiary on the last day of such preceding taxable year. The tax imposed by this subtitle on a beneficiary for a taxable year in which any such amount is included in his income shall be determined only as provided in this section and shall consist of the sum of— “(1) a partial tax computed on the taxable income reduced by an amount equal to the total of such amounts, at the rate and in the manner as if this section had not been enacted, and “(2) a partial tax determined as provided in subsection (b) of this section. “(b) Tax on Distribution.— “(1) In general.— The partial tax imposed by subsection (a)(2) shall be determined— “(A) by determining the number of preceding taxable years of the trust on the last day of which an amount is deemed under section 666(a) to have been distributed, “(B) by taking from the 5 taxable years immediately preceding the year or the accumulation distribution the 1 taxable year for which the beneficiary’s taxable income was the highest and the 1 taxable year for which his taxable income was the lowest, “(C) by adding to the beneficiary’s taxable income for each of the 3 taxable years remaining after the application of subparagraph (B) an amount determined by dividing the amount deemed distributed under section 666 and required to be included in income under subsection (a) by the number of preceding taxable years determined tinder subparagraph (A), and “(D) by determining the average increase in tax for the 3 taxable years referred to in subparagraph (C) resulting from the application of such subparagraph. The partial tax imposed by subsection (a)(2) shall be the excess (if any) of the average increase in tax determined under subparagraph (D), multiplied by the number of preceding taxable years determined under subparagraph (A), over the amount of taxes deemed distributed to the beneficiary under sections 666(b) and (c). “(2) Treatment of loss years.— For purposes of paragraph (1), the taxable income of the beneficiary for any taxable year snail be deemed not to be less than zero. “(3) Certain preceding taxable years not taken into account.— For purposes of paragraph (1), if the amount of the undistributed net income deemed distributed in any preceding taxable year of the trust is less than 25 percent of the amount of the accumulation distribution divided by the number of preceding taxable years to which the accumulation distribution is allocated under section 666(a), the number of preceding taxable years of 90 STAT. 1577the trust with respect to which an amount is deemed distributed to a beneficiary under section 666(a) shall be determined without regard to such year. “(4) Effect of other accumulation distributions.— In computing the partial tax under paragraph (1) for any beneficiary, the income of such beneficiary for each of his prior taxable years shall include amounts previously deemed distributed to such beneficiary in such year under section 666 as a result of prior accumulation distributions (whether from the same or another trust). “(5) Multiple distributions in the same taxable year.— in the case, of accumulation distributions made from more than one trust which are includible in the income of a beneficiary in the same taxable year, the distributions shall be deemed to have been made consecutively in whichever order the beneficiary shall determine. “(c) Special Rule for Multiple Trusts.— “(1) In general.— If, in the same prior taxable year of the beneficiary in which any part of the accumulation distribution from a trust (hereinafter in this paragraph referred to as ‘third trust’) is deemed under section 666(a) to have been distributed to such beneficiary, some part of prior distributions by each of 2 or more other trusts is deemed under section 666(a) to have been distributed to such beneficiary, then subsections (b) and (c) of section 666 shall not apply with respect to such part of the accumulation distribution from such third trust. “(2) Accumulation distributions from trust nut taken into account unless they equal or exceed $1,000.— For purposes of paragraph (1), an accumulation distribution from a trust to a beneficiary shall be taken into account only if such distribution, when added to any prior accumulation distributions from such trust which are deemed under section 666(a) to have been distributed to such beneficiary for the same prior taxable year of the beneficiary, equals or exceeds $1,000.” (2) Section 666 (relating to accumulation distribution allocated to preceding years) is amended by adding at the end thereof the following new subsection: “(e) Denial of Refund to Trusts and Beneficiaries.— No refund or credit shall be allowed to a trust or a beneficiary of such trust for any preceding taxable year by reason of a distribution deemed to have been made by such trust in such year under this section.” (3) Section 668 (relating to treatment of amounts deemed distributed in preceding years) is hereby repealed. (b) Income Accumulated Before Child Attains Age of 21 Years Not To Be Subject to the Throwback Rule.— Subsection (b) of section 665 (defining accumulation distribution) is amended by adding at the end thereof the following new sentence: “For purposes of section 667 (other than subsection (c) thereof, relating to multiple trusts), the amounts specified in paragraph (2) of section 661(a) shall not include amounts properly paid, credited, or required to be distributed to a beneficiary from a trust (other than a foreign trust) as income accumulated before the birth of such beneficiary or before such beneficiary attains the age of 21.” (c) No Accumulation Distribution Where Distributions Do Not Exceed Accounting Income.— Section 665(b)(defining accumulation distribution), its amended by subsection (b), is amended by adding at the end thereof the following new sentence: “If the amounts properly paid, credited, or required to be distributed by the trust for the taxable 90 STAT. 1578year do not exceed the income of the trust for such year, there shall he no accumulation distribution for such year. (d) Repeal of Special Capital Gain Throwback.— (1) Section 669 (relating to treatment of capital gain deemed distributed in preceding years) is hereby repealed. (2) Paragraph (1) of section 665(e)(denning preceding taxable year) is amended— (A) by striking out subparagraph (C), (B) by inserting “or” at the end of subparagraph (A), and (C) by striking out “, or” at the end of subparagraph (B) and inserting in lieu thereof “; and”. (3) Section 665 (definitions applicable to subpart D) is amended by striking out subsections (f) and (g). (e) Special Rule for Gain on Property Transferred to Trust at Less Than Fair Market Value.— (1) In general.— Subpart A of part I of subchapter J of chapter 1 (relating to general rules for taxation of estates and trusts) is amended by adding at the end thereof the following new section: “SEC. 644. SPECIAL RULE FOR GAIN ON PROPERTY TRANSFERRED TO TRUST AT LESS THAN FAIR MARKET VALUE. “(a) Imposition of Tax.— “(1) In general.— If— “(A) a trust (or another trust to which the property is distributed) sells or exchanges property at a gain not more than 2 years after the date of the initial transfer of the property in trust by the transferor, and “(B) the fair market value of such property at the time of the initial transfer in trust by the transferor exceeds the adjusted basis of such property immediately after such transfer, there is hereby imposed a tax determined in accordance with paragraph (2) on the includible gain realized on such sale or exchange. “(2) Amount of tax.— The amount of the tax imposed by paragraph (1) on any includible gain realized on the sale or exchange of any property shall be equal to the sum of— “(A) the excess of— “(i) the tax which would have been imposed under this chapter for the taxable year of the transferor in which the sale or exchange of such property occurs had the amount of the includible gain realized on such sale or exchange, reduced by any deductions properly allocable to such gain, been included in the gross income of the transferor for such taxable year, over “(ii) the tax actually imposed under this chapter for such taxable year on the transferor, plus “(B) if such sale or exchange occurs in a taxable year of the transferor which begins after the beginning of the taxable year of the trust in which such sale or exchange occurs, an amount equal to the amount determined under subparagraph (A) multiplied by the annual rate established under section 6621. “(3) Taxable year for which tax imposed.— The tax imposed by paragraph (1) shall be imposed for the taxable year of the trust which begins with or within the taxable year of the transferer in which the sale or exchange occurs. 90 STAT. 1579 “(4) Tax to be in addition to other taxes.— The tax imposed by tins subsection for any taxable year of the trust shall he in addition to any other tax imposed by this chapter for such taxable year. “(b) Definition of Includible Gain.— For purposes of this section, the term ‘includible gain’ means the lesser of— “(1) the gain realized by the trust on the sale or exchange of any property, or “(2) the excess of the fair market value of such property at the time of the initial transfer in trust by the transferor over the adjusted basis of such property immediately after such transfer, “(c) Character of Includible Gain.— For purposes of subsection (a)— “(1) the character of the includible gain shall be determined as if the property had actually been sold or exchanged by the transferor, and any activities of the trust with respect to the sale or exchange of the property shall be deemed to be activities of the transferor, and “(2) the portion of the includible gain subject to the provisions of section 1245 and section 1250 shall be determined in accordance with regulations prescribed by the Secretary. “(d) Special Rule for Short Sales.— If the trust; sells the property referred to in subsection (a) in a short sale within the 2-year period referred to in such subsection, such 2-year period shall be extended to the date of the closing of such short sale. “(e) Exceptions.— Subsection (a) shall not apply to property— “(1) acquired by the trust from a decedent or which passed to a trust from a decedent (within the meaning of section 1014),or “(2) acquired by a pooled income fluid (as defined in section 642(c)(5)),or “(3) acquired by a charitable remainder annuity trust (as defined in section 664(d)(1)) or a charitable remainder unitrust (as defined in sections 664(d)(2) and (3)),or “(4) if the sale or exchange of the property occurred after the death of the transferor. “(f) Special Rule for Installment Sales.— If the trust elects to report income under section 453 on any sale or exchange to which subsection (a) applies, under regulations prescribed by the Secretary— “(1) subsection (a) shall be applied as if each installment were a separate sale or exchange of property to which such subsection applies, and “(2) the term ‘includible gain’ shall not include any portion of an installment received by the trust after the death of the transferor.” (2) Exclusion of includible gain from taxable income.— Section 641 (relating to imposition of tax) is amended by inserting after subsection (b) the following new subsection: “(c) Exclusion of Includible Gain From Taxable Income.— “(1) General rule.— For purposes of this part, the taxable income of a trust does not include the amount of any includible gain as defined in section 644(b) reduced by any deductions properly allocable thereto. “(2) Cross reference.— “For the taxation of any includible gain, see section 644”. 90 STAT. 1580 (f) Conforming Amendments.— (1) Subparagraph (B) of subsection (a)(2), and subparagraph (B) of subsection (b)(2), of section 1302 (definition of averageable income; related definitions) are each amended by striking out “668(a)” and inserting in lieu thereof “667(a)”. (2) Section 6401(b) (relating to excessive credits), as in effect on the day before the date of the enactment of the Tax Reduction Act of 1975, is amended by striking out “wages),” and inserting in lieu thereof “wages) and”, and by striking out “and 667(b) (relating to taxes paid by certain trusts)”. (3) Section 6401 (b) (relating to excessive credits), as amended by the Tax Reduction Act of 1975, is amended by striking out “lubricating oil),” and inserting in lieu thereof “lubricating oil), and”, and by striking out “and section 667(b) (relating to taxes paid by certain trusts)”. (g) Clerical Amendments.— (1) The table of sections for subpart D of part I of subchapter J of chapter 1 is amended by striking out the items relating to sections 667, 668, and 669 and inserting in lieu thereof the following: “Sec. 667. Treatment of amounts deemed distributed by trust in preceding years.” (2) The table of sections for subpart A of part I of subchapter J of chapter 1 is amended by adding at the end thereof the following new item: “Sec. 644. Special rule for gain on property transferred to trust at less than fair market value.”. (h) Effective Dates.— The amendments made by subsections (a), (b), (c), (d), and (f) of this section shall apply to distributions made in taxable years beginning after December 31, 1975. The amendments made by subsection (e) of this section shall apply to transfers in trust made after May 21, 1976.