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?

[tagteam · Accepted solution]

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@jtax wrote:

Rev. Rule 78-158, Treas. Reg. 1.664-2(d)(3)?

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I believe you meant to write "1.6654-2(d)(3)" and I presume the trust is not required to distribute income currently.

Regardless, there does not appear to be any way to input this into TurboTax during Step-by-Step.

One approach would be to manually adjust the figures on Form 2210 (required installments) and provide an explanatory statement with the return whereby the normal installments would be specified and then the reduction due to Section 1.6654-2(d)(3) would be subtracted therefrom.

Of course, you would write something like "See Attached Statement" on your 2210.

[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.

[tagteam]

@jtax 

Yes, I understand re the standard flag thrown by TurboTax.

Frankly, in that situation I think I might just print and mail the entire return with the attached statement. 

[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?) 

[tagteam]

@NCperson 

Re your last paragraph, Section 1.6654-2(d)(3) does not apply if the trust is required to distribute income currently and if the trust paid any and all tax due, this would not even be an issue.

If the estate or trust is not required to distribute income currently, only the amounts actually distributed to the beneficiary during such period must be taken into account.

[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......

[tagteam]

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@NCperson wrote:

....are any penalties due from either party? 

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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. 

Of course, the trust would not be penalized provided it made the election and made the distribution within 65 days after the close of the tax year.

[tagteam]

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@NCperson wrote:

The beneficiary is still reporting that income from the March, next year distribution as part of the current year tax return......

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Correct, but the last quarterly payment would have been due in January (for the previous tax year). 

It should go without saying that the distribution in March needs to be reported on the prior year tax return if the election is made (e.g., March 2024 distribution is reported on the beneficiary's 2023 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).

[tagteam]

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@jtax wrote:

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)

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I agree, absolutely.

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@jtax wrote:

Seems to me most likely that 

....

• B has no estimated tax income from T because the distribution was not received during the tax year per Rev. Rul. 78-158.

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Again, I absolutely agree.

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@jtax wrote:

• 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.

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Ditto to the above.

[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?  

[tagteam]

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@NCperson wrote:

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?  

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 Section 1.6654-2(d)(3) removes the obligation to pay estimated tax on amounts not actually distributed during the previous tax year (I cited that above and included the relevant statement).

(3) Beneficiaries of estates and trusts. In determining the applicability of the exceptions described in paragraph (a) (2) and (3) of this section as of any installment date, the beneficiary of an estate or trust must take into account his distributable share of income from the estate or trust for the applicable period (whether or not actually distributed) if the trust or estate is required to distribute income to him currently. If the estate or trust is not required to distribute income currently, only the amounts actually distributed to the beneficiary during such period must be taken into account.

Also relevant:

Section 663(b):

(b) Distributions in first sixty-five days of taxable year

If within the first 65 days of any taxable year of an estate or a trust, an amount is properly paid or credited, such amount shall be considered paid or credited on the last day of the preceding taxable year.