(1) For purposes of this section, “entity” means a corporation, partnership, limited liability company, regulated investment company, real estate investment trust, common trust fund, or any other organization in which a trustee has an interest other than a trust or estate to which s. 738.402 applies, a business or activity to which s. 738.403 applies, or an asset-backed security to which s. 738.608 applies.
(2) Except as otherwise provided in this section, a trustee shall allocate to income money received from an entity.
(3) Except as otherwise provided in this section, a trustee shall allocate the following receipts from an entity to principal:
(a) Property other than money.
(b) Money received in one distribution or a series of related distributions in exchange for part or all of a trust’s interest in the entity.
(c) Money received in total or partial liquidation of the entity.
(d) Money received from an entity that is a regulated investment company or a real estate investment trust if the money distributed represents short-term or long-term capital gain realized within the entity.
(4) If a trustee elects, or continues an election made by its predecessor, to reinvest dividends in shares of stock of a distributing corporation or fund, whether evidenced by new certificates or entries on the books of the distributing entity, the new shares shall retain their character as income.
(5) Money is received in partial liquidation:
(a) To the extent the entity, at or near the time of a distribution, indicates that such money is a distribution in partial liquidation; or
(b) If the total amount of money and property received in a distribution or series of related distributions is greater than 20 percent of the entity’s gross assets, as shown by the entity’s year-end financial statements immediately preceding the initial receipt.
(6) Money is not received in partial liquidation, nor may money be taken into account under paragraph (5)(b), to the extent such money does not exceed the amount of income tax a trustee or beneficiary must pay on taxable income of the entity that distributes the money.
(7) The following special rules shall apply to moneys or property received by a private trustee from entities described in this subsection:
(a) Moneys or property received from a targeted entity that is not an investment entity which do not exceed the trust’s pro rata share of the undistributed cumulative net income of the targeted entity during the time an ownership interest in the targeted entity was held by the trust shall be allocated to income. The balance of moneys or property received from a targeted entity shall be allocated to principal.
(b) If trust assets include any interest in an investment entity, the designated amount of moneys or property received from the investment entity shall be treated by the trustee in the same manner as if the trustee had directly held the trust’s pro rata share of the assets of the investment entity attributable to the distribution of such designated amount. Thereafter, distributions shall be treated as principal.
(c) For purposes of this subsection, the following definitions shall apply:
1. “Cumulative net income” means the targeted entity’s net income as determined using the method of accounting regularly used by the targeted entity in preparing its financial statements, or if no financial statements are prepared, the net book income computed for federal income tax purposes, for every year an ownership interest in the entity is held by the trust. The trust’s pro rata share shall be the cumulative net income multiplied by the percentage ownership of the trust.
2. “Designated amount” means moneys or property received from an investment entity during any year that is equal to the amount of the distribution that does not exceed the greater of:
a. The amount of income of the investment entity for the current year, as reported to the trustee by the investment entity for federal income tax purposes; or
b. The amount of income of the investment entity for the current year and the prior 2 years, as reported to the trustee by the investment entity for federal income tax purposes, less any distributions of moneys or property made by the investment entity to the trustee during the prior 2 years.
3. “Investment entity” means a targeted entity that normally derives 50 percent or more of its annual cumulative net income from interest, dividends, annuities, royalties, rental activity, or other passive investments, including income from the sale or exchange of such passive investments.
4. “Private trustee” means a trustee who is an individual, but only if the trustee is unable to utilize the power to adjust between income and principal with respect to receipts from entities described in this subsection pursuant to s. 738.104. A bank, trust company, or other commercial trustee shall not be considered to be a private trustee. 5. “Targeted entity” means any entity that is treated as a partnership, subchapter S corporation, or disregarded entity pursuant to the Internal Revenue Code of 1986, as amended, other than an entity described in s. 738.403.
6. “Undistributed cumulative net income” means the trust’s pro rata share of cumulative net income, less all prior distributions from the targeted entity to the trust that have been allocated to income.
(d) This subsection shall not be construed to modify or change any of the provisions of ss. 738.705 and 738.706 relating to income taxes.
(8) A trustee may rely upon a statement made by an entity about the source or character of a distribution, about the amount of profits of a targeted entity, or about the nature and value of assets of an investment entity if the statement is made at or near the time of distribution by the entity’s board of directors or other person or group of persons authorized to exercise powers to pay money or transfer property comparable to those of a corporation’s board of directors.