8102 / What is the netting procedure applied to determine capital gains (or losses) of a charitable remainder trust?
Capital gains of a charitable remainder trust are determined on a cumulative net basis (under the rules of Treasury Regulation Section 1.664-1(d)(1)) without regard to the provisions of IRC Section 1212. For each taxable year, current and undistributed gains and losses within each class are netted to determine the net gain or loss for that class. The classes of capital gains and losses are then netted against each other in the following order:
(1) First, a net loss from a class of long-term capital gain and loss (beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest rate) is used to offset net gain from each other class of long-term capital gain and loss, in turn, until exhaustion of the class, beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest rate.
(2) Second, either:
(a) a net loss from all the classes of long-term capital gain and loss (beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest rate) is used to offset any net gain from the class of short-term capital gain and loss; or
(b) a net loss from the class of short-term capital gain and loss is used to offset any net gain from each class of long-term capital gain and loss, in turn, until exhaustion of the class, beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest federal income tax rate.
Carry forward of net capital gain. If, at the end of a taxable year, and after the application of Treasury Regulation Section 1.664-1(d)(1)(iv), a trust has any net loss or net gain that is not treated as distributed under Treasury Regulation Section 1.664-1(d)(1)(ii)(a)(2), the net gain or loss is carried over to succeeding taxable years and retains its character in succeeding taxable years as gain or loss from its particular class.1
For examples illustrating the application of the above rules, see Treasury Regulation Section 1.664-1(d)(1)(viii). For special transitional rules, see Treasury Regulation Section 1.664-1(d)(1)(vi).