218
INTERNAL REVENUE CODE OF 1954
deduction under section 1202 (relating to deduction for excess of capital gains over capital losses) shall not be taken into account, (4) EXTRAORDINARY
DIVIDENDS
AND
TAXABLE
STOCK
DIVI-
DENDS.—For purposes only of subpart B (relating to trusts which distribute cun-ent income only), there shall be excluded those items of gross income constituting extraordinary dividends or taxable stock dividends which the fiduciary, acting iti good faith, does not pay or credit to any beneficiary by reason of his determination that such dividends are allocable to corpus under the terms of the governing instrument and applicable local law. (5) TAX-EXEMPT INTEREST.—There shall be included any taxexempt interest to which section 103 applies, reduced by any amounts which would be deductible in respect of disbursements allocable to such interest b u t for the provisions of section 265 (relating to disallowance of certain deductions). (6) FOREIGN INCOME.—In the case of a foreign trust, there shall be included the amounts of gross income from sources without the United States, reduced by any amounts which would be deductible in respect of disbursements allocable to such income but for the provisions of section 265(1) (relating to disallowance of certain deductions). (7) DIVIDENDS.—There shall be included the amount of any dividends excluded from gross income pursuant to section 116 (relating to partial exclusion of dividends received). If the estate or trust is allowed a deduction under section 642(c), the amount of the modifications specified in paragraphs (5) and (6) shall be reduced to the extent that the amount of income which is paid, permanently set aside, or to be used for the purposes specified in section 642(c) is deemed to consist of items specified in those paragraphs. For this purpose, such amount shall (in the absence of specific provisions in the governing instrument) be deemed to consist of the same proportion of each class of items of income of the estate or trust as the total of each class bears to the total of all classes. (b) INCOME.—For purposes of this subpart and subparts B, C, and D, the term "income", when not preceded by the words "taxable", "distributable net", "undistributed net", or "gross", means the amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local law. Items of gross income constituting extraordinary dividends or taxable stock dividends which the fiduciary, acting in good faith, determines to be allocable to corpus under the terms of the governing instrument and applicable local law shall not be considered income. (c) BENEFICIARY.—For purposes of this part, the term "beneficiary" includes heir, legatee, devisee.
§ 643(a)(3)
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