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The Tax Court ruled on a case in December that involved falsified documents, deception and forgery – perpetrated by the wife.
The wife’s tangled web included:
➜ Submitting falsified requests to withdraw funds from her husband’s IRAs
➜ Forging her husband’s signature to endorse the distribution checks
➜ Depositing the funds into a joint account that only she used
➜ Using the proceeds for her personal benefit
The husband did not find out until the next year. The Tax Court said the husband was not required to include the distributions in his gross income and was not liable for the additional tax on early distributions.
Andrew Roberts and his wife, Cristie Smith, maintained two joint checking accounts. Although the accounts were titled in joint name, Roberts exclusively used one account, and Smith exclusively used the other account.
Roberts did not have a checkbook for, write checks on or make withdrawals from Smith’s account, and he didn’t receive or review the bank statements. He didn’t know about, authorize or benefit from any deposits into, or withdrawals from, Smith’s account.
The custodians of Roberts’s two IRAs received requests with his forged signature, faxed from Smith’s workplace, to withdraw approximately $37,000 from his IRAs. Roberts did not make or authorize the requests.
Checks were sent pursuant to the withdrawal request, the endorsement was forged, and the checks were deposited into Smith’s joint account that she maintained separately from Roberts. The court inferred that Smith (or someone on her behalf) forged Roberts’s signature on the distribution requests and endorsements.
Roberts first learned of the unauthorized withdrawals when he received Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., early in the following year. By the time Roberts had determined Smith’s involvement, the couple was already involved in a divorce proceeding.
Roberts advised the trial court of what had happened, and the court’s decree of dissolution took into account that Smith had withdrawn the funds.
Throughout their marriage, Smith prepared and filed a joint income tax return with Roberts. In early 2009, Roberts, although separated from Smith, discussed with her the preparation and filing of a joint income tax return for 2008. He understood from that conversation that he and Smith would still file a joint return.
Roberts gave his tax information to Smith so that she could prepare the 2008 joint return. However, Smith prepared and filed separate returns, using married filing separate filing status for herself and single filing status for Roberts.
On Roberts’s return, Smith made several errors, including not reporting the IRA withdrawals as income. Roberts’s return showed a refund that had been electronically deposited into the joint account controlled by Smith. She did not show Roberts the return or give him a copy, despite his asking for one.
Upon examination, the IRS argued that Roberts should have reported the withdrawals as taxable distributions because he was the owner of the IRAs and the person entitled to receive distributions, the distributions were deposited into a joint account, and they went toward “family living expenses.” The IRS also found it significant that Roberts never attempted to return the funds to the IRAs or contest the distributions once he discovered the payments.
Roberts claimed that he was not a payee or distributee of the funds because the IRA withdrawals were made pursuant to forged requests, the checks were stolen, the endorsement signatures were forged, and he had received no economic benefit.
The Tax Court concluded, based on common sense as well as its finding of fact and analysis, that Roberts was not a payee or distributee of the funds. The court noted that, although it has held that the distributee or payee of an IRA distribution is “generally” the participant or beneficiary entitled to receive the distribution, it has rejected the claim that the recipient is “automatically” the distributee.
The court also found that Roberts’s failure to timely pursue a state law remedy did not necessarily mean that he had received a taxable distribution from his IRA accounts. Thus, on the basis of the overall facts, the court concluded that Roberts did not fail to report any income attributable to the IRA distributions. Because the withdrawals were not distributions taxable to Roberts, he was not liable for the additional tax on early withdrawals.
However, the court ruled against Roberts on the issue of filing status. It reasoned that, because Roberts and Smith were still married on Dec. 31, 2008, and were not separated for the last six months of the year, the proper filing status was married filing separately.
The court also held that, to the extent that the final computations showed that his understatement of tax exceeded the greater of 10 percent of the tax required to be shown on the return or $5,000, Roberts would be liable for a substantial underpayment penalty (Andrew W. Roberts v. Commissioner, 141 TC No. 19, Dec. 30, 2013).
©2014 CPAmerica International
Smaller organizations that lost their exempt status for failure to file the required annual returns for three consecutive years can now retroactively reinstate the tax-exempt status.
Over the past few years, the IRS has attempted to inform organizations of their filing responsibilities and the consequence of failing to file.
Nonetheless, many organizations have failed to comply and have had their tax-exempt status automatically revoked.
Administrators and board members of an organization that has lost its tax-exempt status for failure to file the required returns should be aware of three new procedures outlined in Revenue Procedure 2014-11:
1. An organization that was eligible to file either Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, or Form 990-N (e-Postcard) for each of the three consecutive years it failed to file – and that has not previously had its tax-exempt status automatically revoked – may use the following streamlined retroactive reinstatement process:
➜ Submit an application for reinstatement with the appropriate fee no later than 15 months after the later of the date of the IRS’s Revocation Letter or the date on which the IRS posted the organization’s name on the Revocation List – the list of organizations that have had their tax-exempt status revoked for failure to file returns.
➜ If approved, the organization will be deemed to have reasonable cause for its failures to file Forms 990-EZ or 990-N for three consecutive years, and it will be reinstated retroactively to the date of revocation.
➜ The IRS will not impose a penalty for failure to file the annual returns for the three consecutive tax years if the organization files properly completed and executed paper Forms 990-EZ for all such tax years. For any year that it was eligible to file a Form 990-N, the organization is not required to file a prior-year Form 990-N or Form 990-EZ for that year.
2. An organization that is not eligible to use the process described above may use the following:
➜ Submit a reinstatement application with the applicable fee no later than 15 months after the later of the date of the Revocation Letter or the date the IRS posted the organization’s name on the Revocation List.
➜ File properly completed and executed paper returns for:
◆ All tax years in the consecutive three-year period for which the organization was required to file annual returns but failed to do so, and
◆ Any other tax years after the consecutive three-year period for which required returns were due and not filed.
➜ Also include:
◆ A statement confirming that the paper returns have been filed, and
◆ A Reasonable Cause Statement, described in Section 8.01 of Rev. Proc. 2014-11, showing reasonable cause for its failure to file a required annual return or notice for at least one of the three consecutive years.
➜ If the organization’s application is approved, the IRS will not impose the penalty for the failure to file annual returns for the three consecutive tax years.
3. If it has been more than 15 months from the later of the date of the Revocation Letter or the date on which the IRS posted the organization’s name on the Revocation List:
➜ Follow the steps in the previous section, using instead the required Reasonable Cause Statement described in Section 8.02 of Rev. Proc. 2014-11, showing reasonable cause for its failure to file a required annual return or notice for all three years that it failed to file.
➜ If the organization’s application is approved, the IRS will not impose the penalty for the failure to file annual returns for the three consecutive tax years. ■
©2014 CPAmerica International
If you’re holding money in a traditional IRA, maybe it’s time for you to take another look at a Roth conversion.
Since the $100,000 income limitation was removed in 2010, you have no restriction on your ability to transfer funds from a traditional IRA to a Roth IRA – and no limit on the amount you can transfer.
You will have to pay tax currently on the amount of the transfer that would have been treated as a taxable distribution, if you had actually received the money. But the future benefits can be significant.
Future distributions, including profits, from the Roth account will escape tax entirely, provided you have had a Roth account in place for at least five years. Moreover, there is no required minimum distribution when you reach age 70½.
Statistics recently released by the IRS for 2010 – the latest year for which information is available – show that wealthier people are taking advantage of the Roth conversion opportunity in record numbers. Conversions increased more than nine times in 2010, rising to $64.8 billion from $6.8 billion in 2009, according to IRS data. That was the first year in which Roth conversions exceeded contributions.
The wealthiest Americans – those with estates large enough to be subject to the estate tax – receive an additional benefit. Any income taxes paid as a result of the conversion reduce future estate taxes. Without the conversion, the heirs will eventually pay the income taxes anyway, so the estate tax savings is a net benefit to the family.
A Roth conversion may not be for everyone, but you may wish to take a second look. If you convert in early 2014, you may not have to pay the resulting income taxes until April 15, 2015. That gives you more than a year to continue to use those tax dollars to enhance your retirement savings.
With the IRS relaxing the rules on in-plan Roth conversions, your 401(k) plan should also be considered as a conversion candidate if it offers a Roth account feature.
Yes, it is that time of year. Now that the holidays are over, it’s time to start thinking about income tax. 
Were there any life event changes such as getting married, having a baby, adopting a child, death of a spouse, purchasing a home or any other events that would affect your income tax return?
Start accumulating your documents to prepare your 2013 income tax return. Set aside a box, a file or a cubby to hold tax documents as you receive them in the mail. Be on the lookout for envelopes with “tax document enclosed” on them. You should receive Form W-2 if you were an employee in 2013, Form 1098 Mortgage Interest Statement if you own property, as well as various types of Form 1099, if any. 
You’ll also need Forms K-1 from pass through entities that you have an interest in. You should have been accumulating documents and receipts for tax deductions and contributions received throughout the year.
How will you prepare your income tax return? The IRS offers a free filing on their website for taxpayers with adjusted gross income (AGI) of $57,000 or less. The free filing is a good option for taxpayers with uncomplicated tax situations. There are also numerous tax preparation software packages on the market for individuals ineligible to take advantage of the IRS Free File.
Hiring a professional to prepare your income tax return makes sense when your tax situation includes unusual tax circumstances, numerous investments in rentals or partnerships, or you just need to be confident that your return was prepared correctly and that all possible tax savings were considered.
Now get prepared and get your 2013 income tax return filed by April 15, 2014! (An extension to file is available, but not to pay if you can’t meet this deadline).
A foreign disregarded entity is treated as a foreign branch of a U.S. corporation for U.S. tax purposes.
The IRS defines a foreign disregarded entity (DE) as an “entity that is not created or organized in the United States and that is disregarded as an entity separate from its owner for U.S. income tax purposes.”
The IRS has issued a Chief Counsel Advice (CCA 201349015) providing guidance on the proper reporting of U.S. taxable income and the proper standard for calculating creditable foreign taxes imposed in transactions between a U.S. corporation and:
• Its DE or unincorporated branch; and
• An affiliated U.S. corporation’s foreign branch or disregarded entity.
All of the income of a foreign branch is included in the taxable income of its owner regardless of whether any of the income is actually distributed to the owner.
Transactions between a foreign branch or disregarded entity and its owner are generally disregarded for U.S. tax purposes, although a payment from the foreign branch or DE to its owner may be treated as a branch remittance requiring recognition of currency gain or loss.
The CCA concludes that, because a foreign branch or disregarded entity and its owner are treated as a single entity, transactions conducted between them do not give rise to income or expenses for U.S. tax purposes.
However, U.S. transfer pricing principles could be relevant to determining whether non-arm’s-length transfer pricing has occurred in transactions between a foreign branch or disregarded entity and its U.S. owner that has resulted in a noncompulsory payment of foreign tax that may not be eligible for a U.S. tax credit.
Transactions that are disregarded for U.S. tax purposes may nevertheless impact foreign taxes.
According to the CCA, a primary concern of a non-arm’s-length price between a U.S. taxpayer and its foreign branch or disregarded entity is that it may report too much income in the foreign country, resulting in the overpayment of foreign income tax.
The foreign tax credit regulations include a noncompulsory payment rule, which provides that a foreign tax is not creditable to the extent that the amount paid exceeds the amount that should have been owed under the applicable foreign law.
©2014 CPAmerica International
A federal district court has held that a transaction in which a corporation disposed of equipment and received like-kind property – but its parent company received cash and an obligation to pay the cash six months later – did not qualify for like-kind exchange treatment.
North Central Rental & Leasing is a wholly owned subsidiary of Butler Machinery Company. Butler is a dealer for Caterpillar. North Central is in the business of renting and leasing Caterpillar equipment.
North Central and Butler conducted almost 400 transactions that were structured similar to the following: North Central had old, low-basis equipment that it wanted to sell and replace with new equipment. North Central conveyed that equipment to a qualified intermediary (QI). The QI sold the equipment to an unrelated third party.
Butler purchased replacement equipment from Caterpillar. The replacement equipment was worth approximately the same amount as the old equipment. The QI used the money it received from the sale of the old equipment to purchase new equipment from Butler. The QI then transferred the new equipment to North Central.
As a result of this series of transactions, North Central gave up its old equipment and received new equipment. Butler received the cash proceeds from the sale of the old equipment. Under the terms of its dealer financing arrangement with Caterpillar, Butler was not required to pay over the cash for the new equipment for a period of six months.
The IRS argued that North Central and Butler collectively cashed in their investment in low-basis property. Although North Central continued to hold investment property after the exchange, Butler held only cash for up to six months until the due date of the Caterpillar invoice for the replacement property. North Central argued that Butler was eventually required to pay Caterpillar, so a cashing-out of its investment in like-kind equipment did not occur.
The court found that Butler’s receipt of cash in exchange for equipment, together with its unfettered access to the cash proceeds for a period of several months, rendered the gain on the like-kind exchange transactions recognizable by North Central. The court said that Butler used the cash in the normal course of business (North Central Rental & Leasing v. United States, DC ND, 112 AFTR 2d Paragraph 2013-5544, Sept. 3, 2013).
Essentially, the economic consequences of the exchanges between North Central and Butler provided Butler with cash for a period of up to six months, during which it was free to use the cash for any purpose it deemed necessary.
©2014 CPAmerica International
The IRS has provided new guidance on rollovers within a retirement plan to designated Roth accounts in the same plan – in-plan Roth rollovers.
For a Roth IRA, all contributions are after tax. No deduction is allowed. But amounts held in a Roth IRA that are withdrawn as a qualified distribution are not includable in income or subject to the 10-percent early withdrawal tax.
A qualified distribution is a distribution that is made:
Distributions from a Roth IRA that are not qualified distributions are includable in income to the extent attributable to earnings. They may also be subject to the 10-percent early withdrawal tax.
The 2012 Taxpayer Relief Act allows certain retirement plans to permit participants to elect in-plan Roth rollovers. The new Notice 2013-74 generally expands rules originally published in Notice 2010-84 to apply to all in-plan Roth rollovers, with some modifications.
For example, to be eligible for an in-plan Roth rollover, an amount must be vested. However, the rule that provides that an amount is not eligible for an in-plan Roth rollover unless it satisfies the rules for distribution under the tax code no longer applies.
The new notice provides that the following contributions and related earnings may now be rolled over to a designated Roth account in the same plan without regard to whether the amounts satisfy the conditions for distribution:
No withholding applies to an in-plan Roth rollover of an otherwise nondistributable amount. Further, no part of the rollover may be withheld for voluntary withholding. But an employee making an in-plan Roth rollover may need to increase his withholding or make estimated tax payments to avoid an underpayment penalty.
A plan amendment that provides for in-plan Roth rollovers of otherwise nondistributable amounts is a discretionary amendment. It must be adopted no later than the last day of the first plan year in which the amendment is effective.
However, to give plan sponsors sufficient time to adopt such an amendment and enable plan participants to make in-plan Roth rollovers of otherwise nondistributable amounts before the end of the 2013 plan year, the IRS is extending the deadline. Provided the amendment is effective as of the date the plan first operates in accordance with the amendment, the deadline is now the later of either:
©2014 CPAmerica International
It’s almost time to begin gathering your tax information. You should receive most of your 2013 tax documents by early to mid-February 2014.
Whether you expect to prepare your own return or use the services of a professional, it pays to be organized.
Probably the most important document you need to locate is a copy of last year’s tax return. The tax situation of most individuals does not change dramatically from year to year. So the information shown on last year’s return is a good guide to what you need to look for this year.
On the other hand, if you experienced a life event during 2013, your tax situation could be in for a big adjustment. Life events include marriage, divorce, birth of a child, retirement, a business startup or a change in employment.
Everyone’s situation is different, but most people receive some common tax documents in the mail:
You may receive other income tax-related forms as well:
All of these forms will be needed to see whether you qualify to itemize your deductions. If you are self-employed, you will also need to gather receipts for all deductible business expenses. Check out IRS Publication 535 for more information about business expenses.
Looking ahead to next year at this time, while you’re digging up all these records, sort everything and create files to hold:
Then keep items sorted as they come in during 2014. That way, next year’s income tax return should be easier to prepare.
Christine Peterson was an independent beauty consultant for Mary Kay, Inc. She earned commissions on wholesale purchases of Mary Kay products by her network of independent beauty consultants.
Peterson and Mary Kay entered into a nonqualified deferred compensation arrangement, whereby Peterson would continue to receive a portion of her commissions after retirement.
Christine Peterson and her husband formed a partnership under which they created a defined benefit retirement plan for her. The partnership reported the post retirement payments from Mary Kay as income and deducted contributions to the retirement plan.
The Tax Court agreed with the IRS that the payments made by Mary Kay under the nonqualified deferred compensation arrangement were subject to self-employment tax. Moreover, since the partnership was not engaged in a trade or business, it could not deduct contributions made to the defined benefit retirement plan (Christine C. Peterson and Roger V. Peterson v. Commissioner, TC Memo 2013-27, Nov. 25, 2013).
©2013 CPAmerica International
The Tax Court has determined that payments to a qualified settlement fund may be deducted by an accrual method S corporation only when economic performance occurs and payments are actually made to the fund.
A qualified settlement fund (QSF) is a fund, account or trust established under governmental order or approval to resolve or satisfy claims resulting from events that gave rise to certain liabilities.
In this case, Vidal Suriel owned all of the shares of an S corporation, Vibo Corp. Vibo sold cigarettes. Although Vibo did not own any cigarette manufacturing or packaging equipment, it contracted production with an unrelated Colombian company.
Vibo used the accrual method of accounting for tax purposes. It claimed deductions for unpaid obligations, both principal and interest, owed to the Tobacco Master Settlement Agreement (TMSA) fund, a QSF. The IRS disallowed the deductions on the basis that economic performance had not occurred until payment was actually made into the TMSA fund.
Vibo argued that its obligation arose from the sale of cigarettes by the Colombian company to Vibo. As such, economic performance occurred as the Colombian company provided cigarettes to Vibo.
In essence, Vibo argued that it was assuming the Colombian company’s TMSA payment obligations as a cost of purchasing cigarettes. Vibo said that it should be allowed to deduct the payment obligations as an ordinary and necessary business expense or cost of goods sold.
The IRS argued that Vibo was required to make the payments to the QSF and that economic performance did not occur until Vibo actually made the payments.
The court agreed with the IRS and held that Vibo was not entitled to deductions for unpaid TMSA obligations because economic performance does not occur until the obligations are actually paid. Under Reg. Section 1.468B-3(c), economic performance occurs with respect to a liability to a qualified settlement fund to the extent the obligor pays into the fund to resolve the liability.
Further, because the special rules governing QSFs do not differentiate between interest and principal, no deduction was allowed for the unpaid interest portion (Suriel v. Commissioner, 141 TC No. 16, Dec. 4, 2013).
©2013 CPAmerica International
