Contents

§ 10.14 PENALTIESin taxable gifts from the trust’s grantor and beneficiaries, based on the relevantfacts and circumstances.An allocation to income of all or a part of the gains from the sale or exchangeof trust assets will generally be respected if the allocation is made either pursuantto the terms of the governing instrument and local law, or pursuant to a reasonableand impartial exercise of a discretionary power granted to the fiduciaryby local law or by the governing instrument, if not prohibited by local law. 214(c) Capital Gains and LossesGains from the sale or exchange of capital assets generally are excluded fromdistributable net income to the extent that the gains are allocated to corpus. Capitalgains allocated to corpus are, however, included in distributable net incomeif they are paid, credited, or required to be distributed to a beneficiary duringthe year, or paid, permanently set aside, or to be used for a charitable purpose.Capital gains can be included in distributable net income if the terms of thegoverning instrument and local law permit it. That can also be the outcome pursuantto a reasonable and impartial exercise of discretion by the fiduciary, inaccordance with a power granted to the fiduciary by applicable local law or bythe governing instrument if not prohibited by local law. 215§ 10.14 PENALTIESThe federal tax law contains a variety of penalties that can be applied for violationof various aspects of the law of charitable giving. These penalties are part ofa broader range of accuracy-related penalties. 216The accuracy-related penalty is determined as an amount to be added to theincome tax equal to 20 percent of the portion of the underpayment of tax. 217 Thisbody of law relates to the portion of any underpayment that is attributable toone or more specified acts, including the following:• Negligence 218• Disregard of rules or regulations 219• Any substantial understatement of income tax 220• Any substantial income tax valuation misstatement 221• Any substantial estate or gift tax valuation understatement 222214 Reg. § 1.643(b)-1 (revised), which is effective for tax years of trusts and estates ending after January 2, 2004.215 Reg. § 1.643(a)-3 (revised), which is effective for tax years of trusts and estates ending after January 2, 2004.Reg. § 1.643(a)-3(f).216 IRC § 6662.217 IRC § 6662(a).218 IRC § 6662(b)(1).219 Id.220 IRC § 6662(b)(2).221 IRC § 6662(b)(3).222 IRC § 6662(b)(5). 387