New Developments (As of December 23, 2014)

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Recently, there have been several important IRS and court opinions affecting various areas of taxation.

A. Distribution of benefits to estate beneficiaries.

An executor was aware that the estate would owe significant taxes but instead of distributing the assets to the beneficiaries, he had the estate distribute money to himself and other heirs. As a result, the estate did not have enough funds to pay the taxes. The IRS put a lien against other property owned by the executor. The executor appealed the IRS decision to a Pennsylvania District court. The court upheld the IRS decision stating that the executor is personally liable for depleting the assets of the estate [Stiles, D.C., PA].

B. Energy Credit.

In a private letter ruling, the IRS allowed an energy credit for a solar roof energy system consisting of panels with photovoltaic cells on both sides of the panels. The cells on the back generate energy from sunlight reflected from the roof. The Service said the investment qualifies for the 30% solar credit. However, the amount eligible for the credit was only the amount that the cost of the reflective roof exceeded the cost of a standard roof.

C. ABLE Saving Accounts.

The recent tax extenders bill passed by Congress included a new tax free savings account, effective for 2014, to allow families to make contributions on behalf of long-term disabled individuals. The account is similar to Sec 529 plans-the contributions are not deductible on the federal tax return but earnings are nontaxable. But the contributions may be eligible for a deduction or credit on the taxpayer’s state return.

The annual contributions can’t exceed $14,000 if the person is blind or disabled before age 26. Lifetime contributions are capped at the same amount as the taxpayer’s state’s 529 plan. Distributions are tax free if used to pay costs associated with a disability (housing, education, job training, and similar items). Like 529 plans, distributions exceeding costs and used for non-qualified items are taxable and a 10% penalty is imposed . Owners are still eligible for Medicare benefits and balances of $100,000 or less will not reduce SSI benefits. Rollovers to another ABLE account can be made tax free but must be for the disabled person or a disabled sibling. If the beneficiary dies, the remaining amounts in the account, after the state recovers some of its Medicaid costs, can go to a designated beneficiary but the beneficiary must pay tax on the account earnings, but the 10% penalty does not apply.

D. Employer reimbursement of employees for health insurance.

Previously, the IRS said if the arrangement is made on a pre-tax basis, they violate the 2012 ACA and may result in a $100 per day per worker. The IRS also previously said after-tax arrangement were tax free but recently rescinded that announcement and now say they are no longer tax-exempt.

E. IRA investments in trusts holding gold.

In a private letter ruling, the Service said direct investments in gold bullion are allowed if the gold is held by an independent trustee, shares are marketed to the public and are traded on a public exchange. But the redeemed shares are taxable if the trust allows its holders to convert their shares into physical gold. In this case, the IRA is considered to have acquired a collectible, so the full value of the shares exchanged for gold is a taxable distribution to the IRA owner and taxed as ordinary income.

F. Excess business holdings of a private foundation.

These are subject to a 10% excise tax, but in a recent situation, these excess holdings were caused by a preparer who miscalculated the foundation’s stock holdings and didn’t realize that the foundation was deemed to own more than 20% of a corporation. When the error was discovered, the foundation disposed of the excess stock and the IRS abated the 10% excise tax.

G. Sale of an interest in a lawsuit.

The Tax Court ruled that the sale of such an interest is taxed as a capital gain, not ordinary income. A developer had an option to buy land to build a condo but the landowner would not honor the option. The developer won a law suit to force a sale. The land owner appealed the decision. The developer needed cash, so he assigned his interest in the lawsuit for $5.7 million. The IRS and the Tax Court ruled the amount was ordinary income because he eventually planned to sell the land to his business customers. The developer appealed the Tax Court decision to the 11th Circuit Court of Appeals which ruled the amount is a capital gain because the developer never owned the land but rather sold a right to purchase the land which is a capital asset [Long, 11th Cir.].

H. IRA rollover limits.

Earlier in the year, the Tax Court said an individual can make only one rollover in a 12 month period [Alvin L. Bobrow, TCM 2014-21]. But the IRS proposed regs and Pub. 590 said the one-year rule applies per account, not taxpayer but wouldn’t apply the Tax Court decision before 2015 and would withdraw the temporary regs. Recently, the IRS said the one year rule for a taxpayer (not account) does not apply to a rollover from a traditional IRA to a Roth IRA. But, the rollover from one Roth to another Roth is counted for purposes of the one-rollover per-year rule. This means that if a taxpayer rolls over one Roth IRA to another Roth IRA, he is not allowed to make a rollover from one traditional IRA to another traditional IRA within the same 12 month period. A transition rule for 2015 ignores 2014 distributions that are rolled over in determining whether a 2015 distribution is from a different IRA that did not make or receive a 2014 distribution.

If a distribution occurs on or after January 1, 2015, is rolled over, no additional distributions from a taxpayer’s traditional or Roth IRAs received within one year after the first distribution can receive tax free rollover treatment. This does not apply to direct rollovers between trustees.. There is no limitation on the number of such rollovers. If the IRA trustee gives the IRA owner a check made payable to the receiving trustee, this is treated as a trustee to trustee rollover [IRS Announcement 2014-32, 2014-48 IRB 907; IRS News Release IR-23014-107].

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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