I really appreciate the feedback .   I know it is a distribution.  I never said it wasn't. My original discussion was about whether the beneficiary could deduct all, part or none of  it on his 1040 Sch A.  Your response, correct me if I am wrong, on Sunday  (3) was that he could; correct? How could the beneficiary just realize this distribution when  he needed to go to the Trustee for it since it was a significant amount? Now was my replied statements yesterday incorrect?  They are from an IRS Seminar.  

How so?  (And I do not mean to sound like a wise guy; just trying to save the Trust taxes). Capital Gains and DNI: Capital Gains are normally taxed to the estate or trust because they are  usually not included in DNI unless they are paid, credited, or required to be distributed to any beneficiary during the taxable year (including charitable beneficiaries).  If the instrument is silent with regard to capital gains, capital gains are allocated to corpus (exclude from DNI); Correct? Capital gains allocated to corpus are included in DNI if they are either paid,credited, or required to be distributed to a beneficiary during the year, or paid, permanently set aside, or to be used for a charitable purpose; correct? In certain situations it is easily ascertained whether capital gains are paid to a beneficiary. For example, if the trust instrument provides that the proceeds from the sale of a certain asset are to be paid to a beneficiary upon sale, then any capital gain recognized upon the sale of that asset is paid to the beneficiary and is includable in DNI.   Correct?

Updating information on Fishing License and any tips appreciated: So Client acquired Federal Fishing License when acquiring the boat (commercial fishing) in 1992. An amount for the  Federal License was not separated at time of purchase. Was told by Client it was next to nothing.  Client has since sold boat with no tax basis (cost - acc dep), but still has licenses. Now from that period going forward fishing licenses have been limited and as such the price for them has significantly increased.  Licenses are now allowed to be amortized over 15 years. So how would you handle if your client sold his Federal Fishing License for $75,000 and one of his State Licenses for another $ 30,000?  The buyer will amortize over 15 years ; correct?  And then when he resells it , presumably for a gain, he will have both ordinary or recapture gain and capital gain. Do you think it is far fetched to use a cost basis on the State license $ 14,000 (28 years @ $ 500 per year actual payment) so that the sale shows both capital gain and ordinary?  What other thoughts if it were your client?    

That is the major issue.  I did find a court case where the Canadian Gov't bought back a fishing license. The courts found that even though the Gov't was not using it for business the license is a capital asset. I have not found anything in US

Thank you very much for your response. No I did not mean to confuse the issue.   I earlier found a site where the medical paid by the trust could NOT be taken by beneficiary on 1040 Sch A.  I did NOT think that was correct.  But then I came across the  example regarding the $ 10,000 income and $ 6,000 medical  which made me think that maybe only the beneficiary could take the medical if it was included as DNI (since the beneficiary would be picking up income). Now as far as the original issue: The Trust has interest, dividend, and capital gain  income and expenses.  The Trust does pay tax on the capital gain. The DNI in this case is -0-; so the beneficiary K-1 has no income to report.  Now if the investments sold resulting in the capital gain was specifically sold for the beneficiary medical expense (and it is listed in the document although in this case the document is not to be found) then the Trust tax would be -0-; the beneficiary would pick up income but has Sch A expenses to offset.  The additional capital gain income would affect the state return. Is that possible or am I confusing or not completely understanding the issue?

Thank you. In researching this before I asked the community I found only the following example: Payments on behalf of beneficiary:  A trust pays medical expenses of $ 6,000 directly to medical service providers. The Trust has  $ 10,000 income (interest and dividends). The Schedule K-1 reflects a $ 6,000 income distribution to beneficiary. Note that such medical expenses would also be an itemized deduction on the beneficiary's individual income tax return.  Note of this should be included on Schedule K-1 Line 14H. (Of course it is not mentioned or exampled if the beneficiary can take more medical expenses on 1040 Sch A if the trust  paid more medical expenses than the  $ 10,000)

Yes in a business.  Additional information from client is that the cost of his Federal License was next to nothing and the cost of his State Fishing License was a yearly renewal of $ 525.- since 1985 (every year it was expensed if that can be added to provide some cost basis so the sale may be shown as some ordinary gain and some capital gain).s