Allocation of DNI in Trusts and Estates

Michael Tze-Yee Yu (Assistant Professor, California Western School of Law) has recently posted the abstract of his article entitled A Proposed Allocation of Distributable Net Income to the Separate Shares of a Trust or Estate that Eliminates Inequities under the Regulations upon the Receipt of Tax-Exempt Interest, upon Express Distributions of Income in Respect of a Decedent, or upon Discretionary Distributions of Principal on SSRN.  The article is slated for publication in the Pittsburgh Tax Review.

Here is the abstract of his article:

This article proposes an allocation of distributable net income (DNI) to the separate shares of a trust or estate to replace the regulations’ existing allocation, which produces the following inequities.  First, by excluding tax-exempt interest from the allocation of DNI to the separate shares of trust or estate, the regulations artificially decrease the taxable income of the trust or estate and artificially increase the taxable income of the separate shares of the trust or estate. Second, by allocating the DNI attributable to income in respect of a decedent (IRD) pro rata to the separate shares that could potentially be funded with such IRD, the regulations produce two inequities: (1) a distribution of IRD other than to a separate share artificially decreases the non-separate share recipient of IRD’s taxable income and artificially increases the separate shares’ taxable income, and (2) an express distribution of IRD or a non-pro rata distribution of principal artificially decreases the taxable income of any recipient of either such distribution and artificially increases the taxable income of any person who is not such a recipient. This article’s proposed allocation prevents the foregoing inequities and should replace the existing allocation in the regulations.