New Court And IRS Rulings – March 2016

Mortgage Broker­ – No Self Employment Tax.

A broker who managed mortgages received a fee when he sold his house used as a personal residence. He reported the commission as self employment income but the IRS said he has to pay self- employment tax on the commission. The Tax Court overruled the IRS stating that the commission was not subject to self­employment tax because the sale relates to a personal transaction [Guarino, TC Sum. Op. 2016­12].

Deduction Denied for Amounts Paid to Children.

A taxpayer owned a business and had her children under age nine worked for her doing odd jobs during summer break. She deducted over $10,000 on Schedule C for “wages” paid to her minor children. Most of the payments were not paid to the children but instead were deposited in a 529 account. She did not keep time sheets or give the child a W2. The IRS disallowed the amounts stating she had no proof that the work was performed and the amounts were unreasonable for the work she said the children did. She appealed to the U.S. Tax Court which allowed only $250 per child [Fisher, TC Sum. Op. 2016­10].

Executor Not Personally Liable For Unpaid Estate Taxes.

He distributed bequests to beneficiaries before fully paying the estate taxes. The IRS contended, by doing this, he made the estate insolvent which made him liable for the unpaid taxes to the extent of the distributions. Under state law, the estate was entitled to contributions toward its tax liability from heirs receiving property.The Tax Court disagreed with the IRS stating that after taking into account this contribution right under state law, the estate was not insolvent and the executor was not liable for the unpaid estate taxes [Singer, TC Memo 2016­548].

Payments Not Considered Alimony

A taxpayer made payments of $1,000 per month to his separated spouse until the divorce trial and took a deduction for AGI. The IRS disallowed the deduction because they said his wife had a vested right to the money even if she died. The Tax Court overruled the IRS and allowed the deduction on the grounds that under state law the payments would stop when either spouse died (i.e., they were considered alimony) [Anderson, TC Memo 2016­47].

More Time to Roll Over IRA Premature Distribution

Under the tax law a premature distribution must be redeposited in the IRA or rolled over into another one within 60 days or the distribution is taxable and subject to an additional 10% surcharge if the taxpayer is under age 55 1⁄2. In this case, a bank escheated an inactive IRA to the state without notifying the account owner. The owner found out at a later date what the bank had done and contacted the state agency which returned the funds to him. He requested a private letter ruling and the IRS waived the 60 day rollover period and said the distribution was not taxable.

Taxability of Interest on EE and I Bonds 

Interest on savings bonds must be reported as income on the tax return the earlier of the year the bonds mature or when redeemed. There is an exception if the bonds are used to pay education expenses. To be tax free, the bonds must meet the following requirements:

1. purchased before 1989

2. purchased by taxpayers at least age 24 in the month before the bonds are purchased.

3. bonds must be redeemed to pay undergraduate, graduate and vocational school expenses for the taxpayer, spouse, or dependents. Room and board is not a qualified education expense.

4. the bonds must be in the taxpayer’s name not the spouse or dependent.

The exclusion is phased out for married filing joint if MAGI exceeds $116,300 ($77,550 for married filing separate, heads of household and single). The exclusion is zero when MAGI reaches $146,300 ($92,550 for married filing separate, heads of household and single). The interest is not subject to state and local tax.

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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