There's an interesting discussion about this here:
https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=25374
Which starts out with a report that IRS is proposing a $5,000 frivolous-return penalty for the beneficiary who claimed the withholding shown on a K-1. (It came from tax withheld on an IRA distribution.)
One of the post raises an interesting point: How do you know the trust doesn't have to pay tax on it? For example, if the trust's only income and assets were a $100,000 IRA distribution with $20,000 withheld, it would have been able to distribute only $80,000, and it would have to pay tax on the $20,000 it still has (pending refund). Of course if the trust had other assets -- for example, from the sale of real estate at a loss -- then it could have distributed all of the $100K DNI.
What if there are other items on the return that IRS decides are not reported correctly, and while you think the tax is zero they think it's $10K? Now you don't have any money left to pay the assessment, if the idea was to make this a first and final return.
You can probably get away with calling it backup withholding, but are you sure you want to do that?
