Distributable net income and estates and trusts

Michael T. Yu (Associate Professor, California Western School of Law) has recently published his article entitled Deductions in a Proposed Calculation and Allocation of Distributable Net Income to the Separate Shares of a Trust or Estate, 5 Pitt. Tax Rev. 123 (2008).

Here is an excerpt from the introduction to his article:

This article examines the treatment of certain deductions in the separate share regulations and discusses how the separate share regulations arguably provide two methods for calculating DNI to be used in coordinating the income taxation of a trust or estate with separate shares and of the beneficiaries of such trust or estate. Specifically, this article analyzes how the two methods address the income taxation of a trust or estate with two separate shares in which one separate share has a net loss as to at least one type of income. Such loss, pursuant to the separate share regulations, is “not available” to any other separate share of the trust or estate, and this article discusses how the methods each address such loss. The first method, which calculates DNI at the level of the trust or estate, obscures the separate share’s loss, which is effectively used by the other separate share. On the other hand, the second method, which calculates DNI separately for each separate share, can produce anomalous results in which the total DNI for all separate shares exceeds the DNI of the trust or estate. To address the weaknesses of the two existing methods, this article proposes a calculation and allocation of DNI to the separate shares of a trust or estate that uses both methods but additionally reconciles them by focusing on the items of income and deduction entering into the computation of the DNI of the trust or estate.

Part I of this article provides an overview of the calculation of DNI. Part II addresses how DNI operates in the application of §§ 661 and 662. Part III analyzes the separate share regulations’ two methods for calculating DNI as to a trust or estate with separate shares and discusses the weaknesses of both methods. Finally, Part IV presents and discusses a proposed calculation and allocation, to the separate shares of a trust or estate, of income and deduction items entering into the computation of the DNI of the trust or estate.