ExpertHard1 markMultiple Choice
CPA · Question 21 · Area II: Entity Tax Compliance
A complex trust has Distributable Net Income (DNI) of $40,000 (all ordinary income). The trust instrument requires a distribution of $10,000 to Beneficiary A. The trustee also makes a discretionary distribution of $40,000 to Beneficiary B. What is the taxable income reportable by Beneficiary B?
A complex trust has Distributable Net Income (DNI) of $40,000 (all ordinary income). The trust instrument requires a distribution of $10,000 to Beneficiary A. The trustee also makes a discretionary distribution of $40,000 to Beneficiary B. What is the taxable income reportable by Beneficiary B?
Answer options:
A.
$40,000
B.
$20,000
C.
$30,000
D.
$0
How to approach this question
Tier System: 1. Allocate DNI to Required Income Distributions (Tier 1). 2. Allocate remaining DNI to Other Amounts Paid (Tier 2) pro-rata. DNI $40k - $10k (A) = $30k left for B.
Full Answer
C.$30,000✓ Correct
C
IRC §662(a). Tier 1 distribution to A ($10,000) absorbs the first $10,000 of DNI. Remaining DNI is $30,000. Beneficiary B receives $40,000, but taxable income is limited to the remaining DNI of $30,000.
Common mistakes
Allocating DNI strictly pro-rata based on cash received ($10k/$50k vs $40k/$50k) without respecting the Tier 1 priority.
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