returns.
Before preparing Form 1041, the fiduciary must figure the accounting income of the estate or trust under the
will or trust instrument and applicable local law to determine the amount, if any, of income that is required to be distributed, because the income distribution deduction is based, in part, on that amount.
The first distribution is that required and by IRC and it sounds the Trust documents that would be distributable net income (which is generally net ordinary taxable income less allowable expenses taken by the Trust , plus any tax-exempt Income such as interest of a municipality);
second would be corpus or principal to the extent allowed by state law and if Trust documents so provide.
so i would say what's being taxed is the capital gains.
