In Shakespeare, an English King blames the loss of an important battle on his lack of a horse: “A horse, a horse, my kingdom for a horse!”
In real life (and especially, it seems, in tax law) it is more like to be the lack of a timely piece of paper that causes the taxpayer to lose.
In the course of administering a trust, it sometimes happens that mistakes are made that require correction. For example, distributions may be made that are not in accordance with the provisions of a trust: payments to the wrong beneficiaries, or in the wrong amounts or for the wrong purposes. A similar situation may arise when a trust instrument requires the trustee not to make any disposition of certain “legacy” assets, and the trustee erroneously sells them anyhow.
In such situations, the way to “undo” the transactions is for the parties to reverse the erroneous transaction by returning the distributions made in error. When the year of distribution is a closed tax year and the act of correction is made in a later year, it is important to make sure that the distribution that is returned is treated as a tax-deductible expense, thus offsetting the taxable receipt of the erroneous distribution in the prior tax year.
Continue Reading A Horse, a Horse, My Kingdom for a Horse! Lack of Proper Documentation Dooms IRS Disputes