Did you know that forgiven credit card debt triggered taxable income
Mike Habib, EA
myIRSTaxRelief.com
A new Tax Court case illustrates how a taxpayer generally has taxable income when a credit card company agrees to accept a reduced payment in settlement of his or her account.
“Makeup” required minimum distributions salvage lifetime payouts to nonspouse IRA beneficiary
Mike Habib, EA
myIRSTaxRelief.com
A private letter ruling allows the nonspouse beneficiary of an IRA to salvage lifetime payouts even though she failed an essential rule requiring distributions to begin by the end of the year following the year of the IRA owner’s death. She made up missed annual required minimum distributions (RMDs) and paid a penalty excise tax, but by doing so she avoided a tough 5-year payout rule.
Background. If an IRA owner dies before his required beginning date (RBD), namely Apr. 1 of the year following the year in which age 70 1/2; is attained, then as a general rule his entire interest must be distributed within 5 years of his death. (Code Sec. 401(a)(9)(B)(ii)) However, if any part of the IRA is (1) payable to (or for the benefit of) a designated beneficiary, (2) that part is to be distributed under regs over the life or life expectancy of the designated beneficiary, and (3) the distributions begin not later than 1 year after the date of the deceased’s death (or a later date as prescribed by regs), then that part is treated, for Code Sec. 401(a)(9)(B)(ii) purposes, as paid out when distributions commence. (Code Sec. 401(a)(9)(B)(iii))
Reg. § 1.401(a)(9)-3, Q&A 3(a), says that where there’s a nonspouse beneficiary for the IRA (or a qualified plan account), in order to satisfy the life expectancy payout rule in Code Sec. 401(a)(9)(B)(iii), “distributions must commence on or before the end of the calendar year immediately following the calendar year in which the [IRA owner or employee] died.”
The determination of whether the five-year or lifetime payout rule applies depends on the provisions of the IRA. It may be silent as to which rule (5-year or lifetime payout) applies, specify which rule applies, or it may allow the owner (or beneficiary) to elect which rule applies. (Reg. § 1.401(a)(9)-3, Q&A 4)
Investors suffered theft loss in connection with company that issued sub-prime loans
myIRSTaxRelief.com
A Chief Counsel Advice (CCA) has concluded that a theft occurred in connection with investors’ losses on loans to a company engaged in writing sub-prime loans. However, it determined that whether and when a theft occurred for any particular investor, and what losses resulted from the theft, was a question of fact since the company had been engaged in legitimate business for many years before the theft occurred.
IRS unveils 2008 list of notorious tax scams – the “Dirty Dozen”
IRS website provides guidance on S corporation election problems
Filing Requirements for Filing Status Change, on IRS website
Mike Habib, EA
myIRSTaxRelief.com
In a recent posting on its website, IRS explains the steps to be taken and forms to be filed by taxpayers requesting to change their filing status from a C Corporation (filing Form 1120) to an S Corporation (filing Form 1120S). In particular, IRS explains what to do if a taxpayer hasn’t timely filed Form 2553, and either has or hasn’t filed Form 1120S for the first year of the intended S corporation election.
Background. S corporations are incorporated entities with many of the same attributes as traditional C corporations, including limited liability, transferable ownership, and unlimited life. But unlike C corporations, S corporations are generally not subject to income tax. Instead, the business’s profit or loss is passed through to the shareholders, who report it on their individual returns. To qualify, a corporation must elect S corporation status and meet a number of requirements. It can have no more than 100 shareholders, and only certain types of taxpayers can be shareholders. It can have only one class of stock.
House passes Pension Protection Technical Corrections Act – final action delayed till after recess
IRS eases rules for partial annuity exchanges
Mike Habib, EA
myIRSTaxRelief.com
In 2003, IRS issued a revenue ruling formally sanctioning partial annuity exchanges as qualifying for tax-free treatment under Code Sec. 1035. At the same time, it issued a notice warning that it would go after taxpayers who use partial exchanges to avoid tax under Code Sec. 72(e)(2). It has adopted the interim guidance as final rules in a new revenue procedures. The final guidance reflects modifications that are mostly pro-taxpayer.
Background. Code Sec. 72(e) governs the federal tax treatment of distributions from an annuity contract that are not received as an annuity. Under Code Sec. 72(e)(2), such amounts generally are taxed on an income-first basis. For this purpose, all annuity contracts issued by the same company to the same policyholder during any calendar year are treated as a single annuity contract. (Code Sec. 72(e)(12)) Code Sec. 72(q)(1) imposes a 10% penalty on withdrawals or surrenders of annuity contracts, unless one of the exceptions in Code Sec. 72(q)(2) applies. No gain or loss is recognized on the exchange of an annuity contract for another annuity contract. (Code Sec. 1035(a))
Partial exchanges. In late ’99, IRS acquiesced to a Tax Court decision holding that the direct transfer of a portion of funds from one annuity contract to another qualifies as a nontaxable exchange under Code Sec. 1035. (Conway v. Comm., 111 TC 350 (1998), acq., 1999-2 CB xvi) See Federal Taxes Weekly Alert 12/2/1999)
Final regs clarify treatment of loss from abandoned securities
Mike Habib, EA
myIRSTaxRelief.com
IRS has issued final regs that provide guidance on the availability and character of a loss deduction from abandoned securities under Code Sec. 165. The regs, which adopt proposed regs issued in 2007, apply to securities abandoned after Mar. 12, 2008.
New proposed regs address complex issue – capitalization of tangible assets – Part III
Mike Habib, EA
myIRSTaxRelief.com IRS has issued new comprehensive proposed regs on when amounts are treated as paid to acquire, produce, or improve tangible property. They replace controversial proposed regs that were issued on the same subject in 2006 and that IRS has now withdrawn. The new proposed regs would be effective for tax years beginning on or after the date that they are finalized.
Since the beginning of the week, we have included a series of articles on the topic. This article, the third in the series, explains how the proposed regs would differentiate between currently deductible repairs and improvement or betterments to property that have to be capitalized. For how the proposes regs would define materials and supplies that are deductible under Code Sec. 162, and prescribe new rules for when the deduction for these items may be claimed, see Part I . For how the proposed regs would treat amounts related to the acquisition or production of real or personal property, see Part II.
Observation: The regs would make several significant liberalizations by doing away with the so-called “restoration principle” and putting in place a new routine maintenance safe harbor. They also attempt to reflect the large body of case law on repairs vs. improvements and adopt all-encompassing guidelines where none existed before. However, the regs if adopted nonetheless may be difficult to apply to a particular taxpayer’s facts and circumstances, as evidenced by the plethora of examples, many on them complex, that attempt to illustrate how the regs would affect “typical” capital and non-capital expenditures.
Out with the plan of rehabilitation doctrine. Under the judicially developed plan of rehabilitation doctrine, a taxpayer must capitalize otherwise deductible repair costs if they are incurred as part of a general plan of renovation or rehabilitation. The new proposed regs would specifically provide that repairs made at the same time as an improvement, but that do not directly benefit or are not incurred by reason of the improvement, don’t have to be capitalized under Code Sec. 263(a) . However, a taxpayer would have to capitalize under Code Sec. 263A otherwise deductible repair costs if the taxpayer improves a unit of property and the otherwise deductible repair costs directly benefit or are incurred by reason of the improvement to the property. (Prop Reg § 1.263(a)-3(d)(4)) The preamble adds that when the proposed regs are finalized, the judicially-created plan of rehabilitation doctrine will be obsolete, particularly with regard to the assertion that the doctrine transforms otherwise deductible repair costs into capital improvement costs solely because the repairs are performed at the same time as an improvement, or are pursuant to a maintenance plan, even though the repairs do not improve the property. (Preamble to Prop Reg 03/07/2008)
New proposed regs address complex issue–capitalization of tangible assets
Mike Habib, EA
myIRSTaxRelief.com
IRS has issued new comprehensive proposed regs on when amounts are treated as paid to acquire, produce, or improve tangible property. They replace controversial proposed regs that were issued on the same subject in 2006 and that IRS has now withdrawn. The new proposed regs would be effective for tax years beginning on or after the date that they are finalized.
This article explains how the proposed regs would define materials and supplies that are deductible under Code Sec. 162, and prescribe new rules for when the deduction for these items may be claimed. Future articles will explain other key aspects of the new proposed regs, such as how to treat amounts paid to sell property, transaction costs related to acquisitions, and what constitutes a repair versus an improvement or betterment to property.
Tax Relief Blog