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I have a charitable remainder trust that is invested in stocks and REITs. We received two Form 2439's whereby federal income tax was withheld on undistributed long term capital gains. Ordinarily if the amount of tax withheld had been negligible I would just shine on doing anything, but this trust had over $6,000 withheld on it.
You cannot ask for a federal income tax refund on the Form 5227. I put a call into the IRS and after playing IRS agent roulette, left my name and phone number and was told an agent would call me back within three weeks. He called back yesterday while I was at lunch and left me a voicemail.
He stated that I must file a 1041 with the 5227 and file Schedule D with the 1041.
Has anybody ever had a problem like this?
I put another call back in to ask if I need to file for all of the income transactions on the 1041 or just the activity listed on the Forms 2439?
I have several fears of filing a 1041 for this unitrust:
1. If we only have to list information from the 2439's, I'm concerned we will get an IRS notice stating they had other income reported to them and that they are proposing a tax.
2. If I have to include all income items, then I'm going to have to do some type of override or some adjusting line item to make sure that extra income that isn't distributed isn't taxed in the 1041.
3. If a 1041 is filed, I'm concerned that the Franchise Tax Board will come forward with a notice and wonder why a 541 wasn't filed.
I will let you know what the IRS agent says.
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Member
 
Group: Forum Members
Last Login: 1/3/2012 10:46:42 AM
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This sounds wrong to me. I don't think you can make a 1041 Schedule D work out. It would compute a tax that isn't appropriate for the CRUT.
Can you force a credit out to the beneficiary, via block 13 of Schedule K-1? Let the beneficiary take the credit, and treat it as part payment of the Unitrust amount.
If you use Code A, which is supposed to be for estimated taxes, you could also attach an explanation.
Bill Downs
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Member
Group: Forum Members
Last Login: 8/30/2010 8:41:47 AM
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Bill's suggestion of using the K-1 to distribute the withholding to the beneficiaries could possibly work. If you do this page 24 of the 1041 instructions indicate to use Code B which is for backup withholding. If you do this you may have a problem with the amount of the distribution from the CRT. You may have to reduce the 2008 distribution by any 2007 withholding allocated.
Since this is a situation out of the ordinary it may cause some problems when the IRS attempts to fit whatever you attempt into their system. Therefore is you have the time I would suggest that you talk with the taxpayer advocates office as to the best way to deal with this situation. I would agree with Bill that the answer provided by the IRS does not sound correct. If chose to go the taxpayer advocate way please let us know what their solution is.
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I received a call back from another IRS agent. He started in that I need to include all of the income on the 1041. When I told him the situation and that this was for a CRUT that normally filed Form 5227, he told me that I shouldn't be filing a 1041 at all and that the other agent was wrong.
He told me that I needed to file 990-T or Form 843. He looked at the directions on 990-T and told me to file 990-T.
990-T is for UBTI or other business income and is still the wrong form for this particular situation. I did look at Form 843 however and it looks like it might be a winner. It is for making claims for refunds or requests for abatement. It has check off boxes for quite a few forms, but doesn't include the Form 5227. There is however a check off box that is identified as "Other(specify)".
In all other aspects it looks like Form 843 may be the solution (famous last words). I'll let the board know if this works.
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Just to follow up. We filed two Form 843's for the 2006 and 2007 years in order to ask for refunds. The IRS shot the whole package back with a cover letter saying that we need to file Form 990-T, which is the form filed for situations involving UBTI and is called EXEMPT ORGANIZATION BUSINESS INCOME TAX RETURN (and proxy tax under section 6033(e)).
We are told in the letter to list the backup withholding on line 44(e) of the form and to type in "Erroneous Backup Withholding" to the left of the withheld amount.
At least the Form 843 looked like it conformed to the situation. On this form, I need to put "N/A" in almost every part of the return. There is no box to check for a charitable remainder trust on the return, and many boxes remain unchecked because they don't apply to the situation.
I will let the board know if we get the money refunded.
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| You need to file form 990-T to receive the refund. I did this for a 2006 tax return and had no problems and received the refund.
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