(2) Where the fiduciary adjustment, as defined in section 119.1 of this Part, includes New York State modifications which consist of or relate to items of income, gain, loss or deduction which are charged or credited to corpus or principal for probate or trust accounting purposes, under local law or under the governing instrument, or items in which income beneficiaries do not share pro rata, the fiduciary, subject to subdivision (b) of this section, in lieu of determining the share of the fiduciary adjustment under section 119.2 of this Part, may attribute the respective shares of an estate or trust and its beneficiaries in such fiduciary adjustment:

(i) by attributing the modifications described in section 119.1 of this Part to the estate, trust or beneficiaries, as the case may be, in the manner in which the items of income, gain, loss or deduction which give rise to such modifications are attributed to the estate, trust or beneficiaries under local law or the governing instrument; and

(ii) by allocating the remainder of the modifications which comprise the fiduciary adjustment in accordance with subdivision (a) or (b) of section 119.2 of this Part. Those modifications, or portions thereof, which are not includible in the New York fiduciary adjustment in accordance with the provisions of paragraph (c)(1) of section 119.1 of this Part must be attributed to the estate or trust in determining its New York taxable income regardless of whether an alternate method provided by this section is used by the fiduciary.

(3) Items of income, gain, loss or deduction charged or credited to corpus or principal for probate or trust accounting purposes include, for example, the following:

(i) nondistributable capital gains and losses;

(ii) income in respect of a decedent under section 691 of the Internal Revenue Code, e.g., the portion of any interest income on obligations of the United States, of states other than New York or of their instrumentalities which became payable after death but accrued before death; and

(iii) state or foreign income taxes paid or incurred during the taxable year to the extent allowed as deductions for Federal income tax purposes and attributable either to nondistributable capital gains or to income in respect of a decedent.

(4) Items in which income beneficiaries do not share pro rata include, for example, amounts with respect to which the governing instrument provides:

(i) that all interest income received from tax exempt state or municipal bonds, including bonds of states other than New York and of their instrumentalities, be paid to a designated beneficiary, with all other income to be divided equally among the designated beneficiary and other beneficiaries;

(ii) that all dividends and interest be paid to a designated beneficiary, with all capital gains distributable to a different beneficiary;

(iii) that a fixed annuity be paid out of the income to a designated beneficiary, with the remainder of income to be accumulated or distributed to other beneficiaries; and

(iv) any combination of the foregoing.

(5) Where a modification is subject in part to the alternate method described in subparagraph (i) of paragraph (2) of this subdivision, and in part to the provisions of subparagraph (ii) of such paragraph, the amount to be allocated in accordance with such subparagraph (i) is the proportion of the total modification which the amount of income, gain, loss or deduction attributable to corpus or principal, or to a specially designated beneficiary under local law or governing instrument, bears to the total amount of such income, gain, loss or deduction. The estate of a decedent who died on October 31, 1978 collects $26,000 representing income accrued prior to the date of the decedent's death which constituted corpus or principal for probate or trust accounting purposes. The amount so collected is includible in the estate's Federal and New York taxable income for the first taxable year of the estate, ending June 30, 1979, subject to allowance of a deduction, under section 691(c) of the Internal Revenue Code, for the portion of the Federal estate tax attributable to the amount of accrued income included in the Federal gross estate. During the second taxable year of the estate, ended June 30, 1980, the estate pays a New York State personal income tax of $3,587 (rounded off to the nearest whole dollar amount) for the year ended June 30, 1979, its first taxable year. During the taxable year ended June 30, 1980, it distributes to the sole beneficiary $14,425 out of its Federal distributable net income of $27,200 ( i.e., 53.033 percent of Federal distributable net income). The New York State personal income tax of $3,587 is the only New York State modification applicable to the estate for the year ended June 30, 1980. Since the beneficiary received 53.033 percent of the Federal distributable net income of the estate, the beneficiary's share of the New York fiduciary adjustment computed under section 119.2(a) of this Part would amount to $1,902 ( i.e., 53.033 percent of $3,587). However, under the method prescribed in this subdivision, the $3,587 modification for the taxable year ended June 30, 1980 would be attributable to the estate and the beneficiary in the following manner:

(6) If a modification allocable in accordance with subparagraphs (i) and (ii) of paragraph (2) of this subdivision applies to two or more beneficiaries, the amount to be attributed to each party is the proportion of the modification which the related item of income, gain, loss or deduction allocated to each beneficiary bears to the total amount of income, gain, loss or deduction attributable to all beneficiaries who share therein. Under an agreement of trust, the trustee is required to pay A and B, the grantor's children, all interest from tax-exempt State and municipal bonds, including bonds of states other than New York and their political subdivisions. All other income of the trust is to be divided equally among A and B and the grantor's sisters, C and D. During the year 1979, the trust receives $10,000 of interest on obligations of the State of California which, under section 112.2(a) of this Article, constitutes a New York State modification increasing Federal adjusted gross income. This is the only modification applicable to the income of the trust for 1979. In 1979, the trust also received $20,000 of income from dividends. Under the method of attribution prescribed in this section, the entire $10,000 interest from the California bonds represents a modification to be attributed only to beneficiaries A and B, and such modification should be divided between them in proportion to their equal shares of the bond interest under the governing instrument, i.e., 50 percent of the $10,000 modification, or $5,000 to each. No part of the modification is attributable to C or D because the modification is an item attributed solely to A and B under the governing instrument. Except for the permission granted by this section to attribute modifications as described herein, the shares of C and D in the New York fiduciary adjustment computed under section 119.2(a) of this Part would amount to $1,666.67, representing their respective 16 2 / 3 percent shares of the New York fiduciary adjustment of $10,000. (C's and D's respective shares of Federal distributable net income are 16 2 / 3 percent because each receives $5,000 out of a total trust income of $30,000.)