CPA Regulation (REG) : Distributable Net Income

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #1 : Distributable Net Income

Lake Trust, a simple trust, reported the following items of income and expense during the year:

  • Dividend income: $2,500
  • Taxable interest income: 2,000
  • Capital gains (allocable to corpus): 5,000
  • Accounting fees (allocable to income): (500)
  • Trustee fees (allocable to income): (750)

What is Lake's distributable net income?

Possible Answers:

$3,250

$9,500

$5,000

$8,250

Correct answer:

$3,250

Explanation:

The DNI will include both the dividend and interest income, totaling $4,500. Expenses allocable to income total ($1,250). Netted, these bring DNI to $3,250. Capital gains allocable to corpus are not treated as income, as these remain within the estate and are not distributed to beneficiaries.

Example Question #2 : Distributable Net Income

A distribution from estate income, that was currently required, was made to the estate’s sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiary’s gross income is limited to the estate’s:

Possible Answers:

Net investment income.

Capital gain income.

Distributable net income.

Ordinary gross income.

Correct answer:

Distributable net income.

Explanation:

Distributable net income is the maximum amount a trust or estate may deduct for distributions to beneficiaries.  

Example Question #3 : Distributable Net Income

Which of the following items is not normally taken into account in determining distributable net income of a simple trust?

Possible Answers:

Fiduciary fee

Taxable interest income

Personal exemption

Tax-exempt interest

Correct answer:

Personal exemption

Explanation:

Since trusts are treated as a different class of taxpayer than living individuals, personal exemptions are not allowed for trusts. The other items – interest expenses, management fees, and interest income – are all standard components of a trust’s DNI. 

Example Question #4 : Distributable Net Income

The standard deduction for a trust or an estate in the fiduciary income tax return is:

Possible Answers:

$650

$800

$0

$750

Correct answer:

$0

Explanation:

An estate or trust is not allowed a standard deduction in preparing the fiduciary income tax return.

Example Question #5 : Distributable Net Income

Peter created a trust and transferred property to it. He also retained certain interests. For income tax purposes, Peter was treated as the owner of the trust. Peter created what type of trust?

Possible Answers:

Grantor

Simple

Complex

Pre need funeral

Correct answer:

Grantor

Explanation:

When the creator of a trust is treated as the owner of it, it is referred to as a grantor trust.

Example Question #6 : Distributable Net Income

Which of the following would be deductible for purposes of calculating DNI?

Possible Answers:

Trustee fees not allocable to income

Trustee fees allocable to income

Itemized deductions

Personal expenses

Correct answer:

Trustee fees allocable to income

Explanation:

Only income-related expenses such as trustee fees allocable to income would be allowed to be deducted for DNI purposes.

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