Rule: The income distribution deduction is the LESSER of DNI or the actual amount distributed to the beneficiary.

Choice "c" is correct. Distributable net income is the maximum amount of income from the trust that may be taxed (passed through) to the beneficiary and be deductible by the trust as "the income distribution deduction." [The reason is that the beneficiary will report this amount of taxable income on his/her personal income tax return.] However, while DNI is the maximum amount of the income distribution deduction, the income distribution deduction is the LESSER of DNI or the actual amount distributed to the beneficiary. The amount of the income distribution deduction to the beneficiary is the amount of income that is taxed to the beneficiary.
Typically, we see a situation in which DNI exceeds the amount distributed to the beneficiary; thus, the income distribution deduction would be the amount distributed. In this case, the examiners are truly testing the candidate's ability to understand the concept of DNI, distributions, and the amount that can be deducted by the trust (and thus taxed to the beneficiary) because actual (and required) distributions exceed DNI. Further, the examiners are requiring candidates to make a calculation based on the prorated amount of actual distributions required to be made. Kent is required to receive $60,000 and Lind is required to receive $90,000 per year (for a total of $150,000). The applicable pro-rata portion of the income distribution deduction ($120,000 in this case) for Lind and the amount that would subsequently be includible in Lind's gross income is calculated as follows:

$90,000/$150,000 × $120,000 = $72,000

Choice "b" is incorrect. The amount includible in Lind's gross income is calculated per the above explanation.

Choice "a" is incorrect. The answer ($60,000) is the amount of actual distributions to Kent. While the question asks about Lind, we can take this option one step further for illustrative purposes. Kent received $60,000 in actual distributions, but the maximum income distribution for Kent (and the amount that will show up on Kent's K-1 from the trust) is $48,000 [$60,000/$150,000 × $120,000].

Choice "d" is incorrect. Lind received $90,000 in actual distributions, but the maximum income distribution for Lind (and the amount that will show up on Lind's K-1 from the trust) is $72,000 [$90,000/$150,000 × $120,000].