Constructive Receipt of Income

[Sam Slade]

A taxpayer received a k-1 from an estate in 2006 and included all the income on her 2006 tax return. She still hasn't received any of the income stated on the k-1 because the estate settlement is still being contested. Shouldn't she file an amended return for 2006 since she has not constructively received the income?

[outwest]

Constructive receipt has happened..

at the entity level. Timing of distribution to the beneficiary has nothing to do with what happened at the entity which is the level that the constructive receipt income recognition doctrine applies.

Same thing in a partnership. Cash basis partnership recognizes income and issues k-1 regardless of distributions or lack thereof.

[Burke]

Doesn't exactly work that way in an estate. There is a distribution deduction calculated on Page 2 of the 1041 that determines income passed through to a beneficiary. She should inquire about that from the fiduciary, and the tax preparer who did the estate return if necessary, as to where it came from and what it represented. You say it is being contested. Were funds paid into an escrow account with the court?? As a beneficiary, she can request a copy of the 1041 return.

[outwest]

True enough..

but the question was "constructive receipt" and there is a whole world of issues we could drag in if we want to expand the question.

[Davc]

but the question was "constructive receipt" and there is a whole world of issues we could drag in if we want to expand the question.

Constructive receipt is not the issue. See Schedule B form 1041.

[Kram BergGold]

Some clarity

If an Estate makes no distributions it pays the taxes on all income. If it makes a distribution the beni's report the income up to the amounts distributed. If there is more income than distributions then the Estate reports the rest. In your case if there were no distributions then the Estate should not have issued K-1 Forms. To me, the Estate needs to amend the 2006 return unless it distributed some money which got held up in an escrow account due to someone contesting things. In this case the 1041 is ok but maybe your client does have a claim that he never received constructive receipt of the money and his or her 1040 should be amended.

.

[Davc]

If an Estate makes no distributions it pays the taxes on all income.
.

Please see page 32 of the 1041 instructions An actual distribution is not always required..

[Burke]

Page 32 details when income amts are included in beneficiaries' income. It refers to amts "required" to be distributed currently, or amts actually paid, credited, etc, etc. In the case of an estate (not a trust) this is rare. It would have to be stated in the will and I have never seen one which has this. Even if it did, beneficiaries would still have a secondary claim to creditors, taxes due, and satisfaction of other obligations in order to meet state laws. Trusts are another matter. My advice still stands that OP should contact the fiduciary, get a copy of the 1041 return and review how they determined a distribution, deemed or otherwise and a calculation of the amts passed thru to the K-1. If the estate is settled, and amounts paid into an escrow fund with the court, it is beyond me how that can be constructive receipt for tax purposes, since the corpus may ultimately be paid to other persons contesting the will or division of assets. Normally, an estate is kept open in the event of an adverse claim. When you determine what is going on, please keep us informed as to the outcome.