I have a client who is the administrator of an estate that is in litigation between the beneficiaries. The administrator is under a court order to pay only expenses and distribute nothing to the beneficiaries until the matter is resolved. The income to the estate is significant and results in a higher tax rate than the beneficiaries are likely to pay had the income been distributed. I have not encountered this situation before and seeking input from the group on the proper handling of the Form 1041. The IRS Specialty Tax Hotline admitted that this situation was beyond their scope in providing guidance. It seems to me that some of the possiblities are:
1 - Report all the income and expenses and pay the higher rate and somehow file amended returns for the estate fiscal years affected or, when the litigation is settled, file a claim for refund of prior year tax payments. 2 - Report only the portion of income used to pay expenses and the associated expenses, and include an explanatory note along with a copy of the court order. 3 - Report all income and expenses and include an expense for the amounts that would have been distributed but for the court order, and then file amended return or report income when the litigation is resolved.I would appreciate any suggestions or benefit of any experience others may have had in a similar situation. Thanks.
Gordon Bond