ExpertHard1 markMultiple Choice
CPA · Question 44 · Area II: Entity Tax Compliance
A trust has $50,000 of DNI. The trustee is required to distribute $30,000 to Beneficiary A and has discretion to distribute remaining income to Beneficiary B. The trustee distributes $30,000 to A and $40,000 to B. How much income does Beneficiary B report?
A trust has $50,000 of DNI. The trustee is required to distribute $30,000 to Beneficiary A and has discretion to distribute remaining income to Beneficiary B. The trustee distributes $30,000 to A and $40,000 to B. How much income does Beneficiary B report?
Answer options:
A.
$40,000
B.
$20,000
C.
$25,000
D.
$0
How to approach this question
Apply Tier System. Tier 1 (Mandatory) soaks up DNI first. Tier 2 (Discretionary) gets leftovers.
Full Answer
B.$20,000✓ Correct
B
IRC §662(a). <br/>Tier 1 (Required): $30,000. Absorbs $30,000 of DNI. <br/>Remaining DNI = $50,000 - $30,000 = $20,000. <br/>Tier 2 (Discretionary): $40,000 distribution is limited to the remaining $20,000 DNI. <br/>Beneficiary B reports $20,000.
Common mistakes
Pro-rating DNI based on total distributions without regard to tiers.
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