This year, the Zhao Estate generated distributable net income (DNI) of $100,000, one-fourth of which was tax- exempt interest, and the balance of which was long-term capital gain. Kyle Zhao, the sole income beneficiary of the estate, received a distribution of the entire $125,000 accounting income of the entity. How does Kyle report the distribution?

Question

Quizplus · Accepted Answer

The distribution to Kyle Zhao includes $75,000 of long-term capital gain (which is three-fourths of the DNI, as one-fourth is tax-exempt interest) and $25,000 of tax-exempt interest (which is one-fourth of the DNI). The distribution exceeds the DNI because the accounting income is higher, but for tax purposes, Kyle reports the components of the DNI: $75,000 as long-term capital gain and $25,000 as exempt interest.

This Year, the Zhao Estate Generated Distributable Net Income (DNI)