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The DNI of an estate or trust limits the amount on which
beneficiaries can be taxed under section 662.7 DNI is an
"artificial concept" which ensures that trust beneficiaries are
not taxed on more than "the trust's actual net income."
Estate of Petschek v. Commissioner, supra at 71. The Internal
Revenue Code defines DNI as the taxable income of the estate or
trust modified for deductions for distributions, deductions for
personal exemptions, capital gains and losses, extraordinary
dividends and taxable stock dividends, tax-exempt interest, and
income of foreign trusts. Sec. 643(a). DNI includes tax-exempt
interest under section 103, reduced by any amounts "which would
be deductible in respect of disbursements allocable to such
interest but for the provisions of section 265 (relating to
disallowance of certain deductions)." Sec. 643(a)(5). It is
usually not calculated until the end of the taxable year. See
Estate of Petschek v. Commissioner, supra at 71.
Where the trust distributes an amount greater than its DNI,
each beneficiary includes in his or her gross income only "an
amount equivalent to his proportionate share of such
7 The regulations describe the effects of DNI as follows:
It limits the deductions allowable to estates and
trusts for amounts paid, credited or required to be
distributed to beneficiaries and is used to determine
how much of an amount paid, credited, or required to be
distributed to a beneficiary will be includable in his
gross income. It is also used to determine the
character of distributions to the beneficiaries.
[Sec. 1.643(a)-0, Income Tax Regs.]
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Last modified: May 25, 2011