estimated tax penalty / form 2210 / Rev. Rul. 78-158 / trust distributions in next year

[jtax]

For an individual filing a 1040 who receives a K-1 from a trust for a distribution made in the first 65 days of the next tax year but applied to the current individual tax year because of the trust's 663(b) election:

How (procedurally/ideally within TurboTax desktop) does one show the IRS that no estimated tax penalty is owed (or is reduced) because the income from the trust distribution is not deemed to be income in the current tax year because it was not actually received during the tax year. Rev. Rule 78-158, Treas. Reg. 1.6654-2(d)(3)? [edited to correct citation]

I cannot see how to do that on the 2210 or within TT.

Is the only way to do it, to pay the penalty and then amend to request a refund with some attachments citing the revenue ruling, regs, and particular data?

[jtax]

@tagteam Thank you for that suggestion. That does get rid of the penalty, though of course there is the standard TT warning that one should not override calculations for efiling.

You are right I had a typo in the reg citation. And yes no trust distributions were required.

[NCperson]

@jtax - did you check box C on form 2210?  then you can manually adjust any input fields necessary and that would not be 'overriding' the software. 

All the K-1 income would be received in the 4th quarter and not reflected in the first three columns of form 2210 and form 2210ai.  

would that work? 

(if the trust income was large enough, wouldn't the trust have been required to make quarterly estimated payments to avoid the under payment penalties? my point is if neither the trust or the beneficiary made quarterly estimates, isn't the IRS expecting one of these two taxpayers to pay the interest penalties?) 

[NCperson]

@tagteam so let's assume that the Trust doesn't distribute anything until March of the following tax year and neither the trust or beneficiary made estimated payments during the current tax year related to this trust income, are any penalties due from either party?  The beneficiary is still reporting that income from the March, next year distribution as part of the current year tax return......

[jtax]

@NCperson 

>did you check box C on form 2210? 

No.

>then you can manually adjust any input fields necessary and that would not be 'overriding' the software. 

I'm not sure that works. I think all that does is to omit the 2210 from your return and let the IRS computers calculate the penalty based on their records.

Also there really isn't an input field that would work. It is the required annual payment that needs to be changed and that is calculated.

>All the K-1 income would be received in the 4th quarter and not reflected in the first three columns

>of form 2210 and form 2210ai.  

As mentioned by @tagteam, the K-1 incomeis not included in any quarter's income per Rev. Rul. 78-158 and the cited reg. In general pass through recipients must count the income when the pass thru receives the income. But this does not apply to discretionary distributions made by a trust in a subsequent tax year making a 663(b) election.

[jtax]

>so let's assume that the Trust doesn't distribute anything until March of the following tax year

>and neither the trust or beneficiary made estimated payments

>during the current tax year related to this trust income, are any penalties due from either party? 

>The beneficiary is still reporting that income from the March,

>next year distribution as part of the current year tax return......

>Possibly, if the trust made a 663(b) election, the beneficiary received income in March,

>and the beneficiary did not make sufficient estimated tax payments

>(or have sufficient withholding)

>during the tax year (i.e., quarterly payments due April, June, September, and January. 

I don't know. To be clear lets say the current tax year is 2023. Trust T distributes a discretionary distribution to bene B in Feb 2024 and makes a timely 663(b) election in T's calendar year 2023 1041 (filed in 2024). B receives a 2023 K-1 for income portion of the distribution. There is no other distribution from T to B in 2023.

Seems to me most likely that 

• T has no estimated tax liability on the distributed income. T gets a distribution deduction and therefore has no taxable income (on the distributed income anyway)
• B has no estimated tax income from T because the distribution was not received during the tax year per Rev. Rul. 78-158.
  • that makes sense (from a policy not legal perspective) because the distribution not only was not not received in the tax year (2023), but it was received after the last estimated installment date of 1/15/24. And B may have had no advance notice.
• I also don't see (at first look) that B has an requirement of an estimated tax payment on the distributed income for 2024 because the distribution income is only taxed in 2023.

[NCperson]

@jtax @tagteam - maybe I am not following your responses, but is one saying that the K-1 reported income is to be part of the 4th quarter analysis of form 2210 and one is stating it need not be? I am confused.  

@jtax - if your income is "lumpy" why are you not checking Box C? that is the way to avoid underreporting penalties (and then completing form 2210ai).

[NCperson]

@jtax  counter-argument ... form 2210 requires payment of 90% of the current year tax liability to avoid under estimated interest penalties (as one of the ways of avoiding the penalty). 

Even if not received until March of the following tax year, that distribution creates part of the current year tax liability. 

Where is the source that states  (I can't find one) that says the distribution from a trust received in that post Dec 31 period is removed from what constitutes 90% of the current year tax liability?