IRA Once-Per-Year Rollover Rule Clarified

IRS announced a change, this week, in the application of the one-per-year rule applicable to IRA rollovers, occasioned by a recent decision of the Tax Court.

Starting January 1, 2015, an individual will be allowed one rollover per year, regardless of how many different IRAs he owns – the limitation will apply by forcing the taxpayer to aggregate all of his IRAs, effectively treating them as if they were one IRA for purposes of applying the limit.  See IR-2014-107 for the details.

New IRS YouTube Video Warns of Scammers

The IRS continues to be worked up over the ongoing problem of aggressive telephone scammers who harass taxpayers.  In a recent release, IRS advises about five things which scammers often do, but which IRS will not do:

  • Telephone a taxpayer to demand immediate payment
  • Demand that a taxpayer pay without offering the opportunity to question or appeal the amount they say you owe
  • Require you to use a specific payment method
  • Ask for credit or debit card account numbers over the phone
  • Threaten arrest by local police or other law enforcement groups when taxes are not paid

Check out http://www.youtube.com/user/irsvideos.

Tax Not Always Discharged in Bankruptcy

In Vaughn (CA 10 8/26/14), the Tenth Circuit tells us that a taxpayer who entered into a tax shelter that created “artificial” losses willfully attempted to evade tax, and thus could not have his tax liability discharged in a Chapter 11 bankruptcy proceeding.

The taxpayer’s 1999 return, in this case, reported a large gain from the sale of his company, as well as a large loss arising from a strategy known as “Bond Linked Issue Premium Structure” (BLIPS), which had hit the IRS’ radar as one of several forms of transaction designed to give taxpayers an artificially high basis in partnership interests, thereby giving rise to deductible losses on disposition of those partnership interests.

Under Chapter 11, the law does not allow for discharge of any debt for a tax with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat the tax.

Quid Pro Quo Donations Scrutinized by IRS

The Tax Court recently issued a tough lesson to taxpayers in its Seventeen Seventy Sherman Street, LLC  (TC Memo 2014-124) decision, in ruling that a taxpayer received two items of property in return for its contribution of an easement, but failed to consider the value of all of the property received.  The result?  No deduction whatsoever with respect to the donated easement!  Failure to value all of the consideration received led to the conclusion that failure to prove the fair market value of the easements exceeded the value of the consideration received in return!

Capital Gains Rates

As the 2014 tax planning season comes upon us (just as the last extension date for filing 2013 returns comes and goes), folks should not lose sight of the advantageous way in which long-term capital gains are taxed.

  • 20% rate if the gains would otherwise be taxed at a rate of 39.6% if they were taxed as ordinary income
  • 15% rate if the gains would otherwise be taxed at between 15% and 39.6% if taxed as ordinary income
  • 0% rate if the gains would otherwise be taxed at a rate of 10% or 15%

Strict Substantiation Rules Govern Property Donations to Charity

Check the recent Tax Court decision in the Smith case (TC Memo 2014-203) before you get too cavalier with your tax documentation.

This chap donated about $27,000 (according to him) worth of household goods, clothing and electronic equipment in 2009 to a legitimate charity, the fact of which was not challenged.  The IRS and the Court, however, rendered none of the donations tax deductible because the taxpayer flunked the charitable contribution substantiation tests.

Despite the fact that the taxpayer had consulted a Salvation Army website which revealed estimated “low” and “high” values for used property, he nonetheless assigned values to his items which were considerably higher than the “high” values listed, and he did not take photographs of any of the items donated, nor did he introduce any evidence to establish their condition.

For noncash contributions in excess of $500, taxpayers are required to maintain written records with respect to each item of donated property, to include:

  • The approximate date the property was acquired and the manner of acquisition
  • A description of the property
  • The cost or other basis of the property
  • The fair market value of the property at the time it was contributed
  • The method used in determining the fair market value

No deduction is allowed for contributions of clothing or household goods unless such items are “in good used condition or better.”

Don’t Forget IRA-Required Distribution as Year End Approaches

The last quarter of the year is just around the corner, and those of you age 70-1/2 and older should be sure to withdraw from your IRA the “required minimum distribution” (RMD) lest you be subjected to the onerous 50% penalty if you don’t.

Taxpayers must begin RMD withdrawals no later than April 1 following the year in which they reach age 70-1/2, and by December 31 of each calendar year thereafter.

The amount of each RMD is computed separately for each IRA, if you have more than one account, though the aggregate total may be paid out from any one or more of your IRAs.

Section 83 Governs Tax on Property Received for Services

Section 83 provides that any person who performs services in connection with which he receives property may elect to include in gross income for the taxable year of the transfer the excess of the fair market value of the property over the amount paid for it, even in a case in which the property is subject to a substantial risk of forfeiture.

The election is made by filing one copy of a written statement with the IRS office with which the taxpayer files his return within a stipulated period of time, and, in addition, a copy of the statement is supposed to be submitted with the income tax return itself for the year of the transfer.

Recent PLR 201438006, however, provides a bit of leniency regarding the requirement to include a copy of the election with the tax return, noting that failure to submit another copy won’t affect the election’s validity.

IRS Provides YouTube Tips on New Health Care Law

The recently-released videos are part of a series on the IRS YouTube channel, featuring IRS Commissioner Koskinen discussing the premium tax credit and the individual shared responsibility provision, which folks will want to know all about before filing their 2014 tax returns.

“For most people, filing their returns in the spring of 2015 is going to be fairly simple….and that is they’ll simply check a box indicating that they have qualifying insurance or they’ll indicate that they’re eligible for an exemption.  Otherwise, they’ll calculate their shared responsibility payment and add it to their tax return,” says Koskinen.

Go to www.irs.gov for the videos and www.irs.gov/aca for Health Care Tax Tips.

Multiple Businesses Require Separate Schedule C for Each

And that wasn’t the only lesson the Tax Court recently taught taxpayer Zierdt (Douglas Zierdt v. Commissioner, TC Summary Opinion 2014-78).

This taxpayer worked part time as a stock broker, while also considering himself a professional gambler.  In preparing his own returns, he combined (i.e.-netted) his gambling losses) against his income from stock brokering.  The Court noted that “He did not file separate Schedules C with his returns, and instead he claimed deductions for gambling expenses on Schedules C that identified the business activity as ‘stockbroker’.  Such inaccurate and misleading income tax reporting does not reflect a reasonable attempt to comply with the Code.”

Moreover, the Court found that the gambling activity was not a true “trade or business” at all,  but a hobby instead and thus disallowed the gambling losses.  The facts that the taxpayer had net gambling losses for each of the years 2006 through 2010, combined with the fact that he did not maintain complete and accurate records were the main reasons for the Court’s conclusions.

And by the way, the bad reporting and lack of documentation led the Court to the additional conclusion that no “reasonable cause” existed to excuse Mr. Zierdt from imposition of the accuracy-related penalties for several of the years.