Jeffrey A. Quinn: May 2011 Archives

May 31, 2011

Estate Tax Reporting: Confusion Reigns

Recall that pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax was repealed for 2010 decedents. The executors of estates for 2010 decedents were required to file an information return, nonetheless, which was due on the due date of the decedent's final Form 1040 -- or April 18, 2011. Then along came Congress in late 2010 with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010) which technically reinstated the estate tax -- at the "election" of the executor -- for persons who died in 2010.

So, executors are now faced with a dilemma: incur estate tax, in return for asset basis "step up" to full fair market value, or "elect out." If the election "out" were made by the executor, the "carryover basis" rules apply to assets passing to heirs with a couple of exceptions: the estate would receive $1.3 million of basis "step up", plus an additional $3 million "step up" for assets passing to a surviving spouse. (Learn more about the role of executors in Nolo's Executor FAQ.)

But how was this election "out" to be documented?

Initially, IRS released a draft of new Form 8939 ("Allocation of Increase in Basis for Property Acquired From a Decedent") and suggested that the form was to be filed by April 18, 2011 with the decedent's final individual income tax return. Then, on March 31, 2011, along came IR 2011-33, wherein IRS explicitly stated:

    "The Treasury Department and the Internal Revenue Service today announced that Form 8939 is not due on April 18, 2011, and should not be filed with the final Form 1040 of persons who died in 2010. New guidance that announces the form due date will be issued at a later date, and Form 8939 will be released soon after guidance is issued."

All of this leaves executors in a quandary resulting from having to compare the cost of paying some estate tax under the old rules and receiving a full basis step up, thus saving (potentially) future income taxes, or sticking with the carryover basis regime and possibly paying income taxes down the line (when assets may be sold) at some tax rate presently unknown.

In any case, stay tuned -- the next issue on the horizon will be the need to wrestle with the final version of Form 8939, at which time the executor's decision must be made. Rumor has it that the form will be finalized in time to enable a final due date of something like November 15, 2011.

May 26, 2011

$4 Per Gallon for Gas? Not High Enough for IRS!

Nope -- we guess it has to go a bit higher before IRS decides enough is enough, and the standard mileage rate ought to be raised.

Seems that during its May 12 payroll industry conference call, an IRS spokesperson said that the IRS has no current plans to increase the present standard rate of 51 cents per mile.

Recall that the standard rate for owned or leased cars (including vans and some trucks) was previously set at 51 cents for business travel after 2010. (Likewise, the 2011 rate for medical usage of your auto, or for its use in connection with moving is 19 cents per mile.)

The 51 cents per mile rate can also be used by employers for reimbursement of employees required to use their own auto for business, and who want to deem the reimbursement as having been made under an "accountable" expense reimbursement plan, as long as the employees appropriately document the usage to the employer. (More from Nolo on Business Tax and Deductions.)

IRS generally announces each year's standard mileage rate near the beginning of the new tax year, but it's not unheard of that they make a mid year correction - such as the action they took in 2008 when gas prices last spiked in a manner similar to recent experience.

But such is not in the cards, according to Ligeia Donis, Assistant Branch Chief, Office of the Chief Counsel, notwithstanding the recent spate of gas cost increases. And for two reasons, according to Donis: the possibility that gas prices could decline, and some recent whining by employers that mid-year changes are difficult to implement.

Time will tell -- the year isn't even half over yet.

May 18, 2011

IRS Hangs Tough on IRA 60-Day Rollover Deadline

In a recent private letter ruling (PLR 201118025), IRS got pretty tough with a taxpayer whose IRA rollover took a bit longer than the permissible 60 days.

IRS sometimes offers a bit of leniency in these cases. Rev Proc 2003-16 outlines the situations in which leniency might be appropriate, and notes "The Service will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer." But not so in this case.

Here, the taxpayer and his siblings wanted to help their elderly mother purchase (for cash) a new residence, necessitated by her mobility limitations which made it unsafe for her to remain in her two-story residence. So, the taxpayer took a distribution from his IRA and applied the funds toward a new residence for his mother who then secured a reverse mortgage to generate the funds to repay the taxpayer and his siblings.

Despite assurances from the bank (that the mortgage process would be completed in time to enable the taxpayer to meet his 60-day rollover requirement) delays ensued and the taxpayer missed the deadline. He pled mercy -- claiming that his failure to timely complete the rollover was due to "numerous and unreasonable processing delays" which "were beyond his control."

But IRS concluded that the taxpayer had not presented any evidence as to how any of the factors outlined in Rev Proc 2003-16 affected his ability to timely complete the rollover. Those factors include:

  1. Errors committed by a financial institution;
  2. Inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error;
  3. The use of the amount distributed; and
  4. The time elapsed since the distribution occurred.

IRS' position in this case was that none of the above applied -- the taxpayer's IRA funds were simply used to make a short-term loan to Mom. Period.

Bottom line -- push the 60-day time limit at your own peril.

May 12, 2011

IRS Offers Continuing Education Opportunity

Now that the rigors of the tax filing season have eased a bit, it's time for those of us in the "tax professionals" community to start giving thought to the fulfillment of this year's continuing education requirements.

And the IRS has come forth with an offer -- forums for tax professionals in six cities, starting this summer. Enrolled agents, CPAs, certified finanacial planners and other tax professionals may wish to consider the offer -- three day events presented by IRS experts, discussing any number of topics involving federal and state tax issues. Some 40 different topics will be covered, each qualifying for continuing education credit, as may be approved by the various licensing bodies.

The forums will be conducted in the traditional seminar format, and will also feature a two day "expo," designed to fill tax professionals' needs, with representatives from IRS and other tax, financial, and business communities, offering their products and services. Attendees will also be exposed to the IRS "Preparer Services Room," to learn about the IRS's e-Services, offer comments on various initiatives and programs, or participate in a focus group.

And for those, perhaps, with unresolved pending problems, attendees will be invited to bring their most challenging unresolved case to the "Case Resolution Room," for some IRS assistance. The Service notes that last year, a total of 1,235 cases experienced a 97% on-site resolution rate.

Check out www.irstaxforum.com for details of dates, cities, costs and continuing education credits available.

May 4, 2011

Short Sales, Foreclosures, and Debt Forgiveness

The present economic environment has led many folks to lose their homes because of inability to satisfy their mortgages. Transactions take several forms, but foreclosures and short sales have become fairly common. While homeowners typically think of these deals as giving rise to a "loss," such is not always the case for tax purposes.

Generally speaking, a taxpayer realizes some form of income when a debt is cancelled, forgiven, or reduced by the lender. And lender actions of this nature often come into play when a taxpayer restructures the acquisition debt on his principal residence, loses a principal residence in a foreclosure, or sells his principal residence in a short sale.

But the Mortgage Relief Act, effective for debt discharged on or after January 1, 2007 and before January 1, 2013 generally allows taxpayers to exclude up to $2 million of such mortgage debt relief associated with their principal residence. The tax return for the year in which an event of this kind takes place should contain IRS Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness". Though income may be excluded, the price of this favor bestowed by the IRS is reduction of the basis in the principal residence (though not below zero). More information from the IRS on cancelled or forgiven debt is here.

Note that these provisions relate only to one's principal residence -- there will be no exclusion for debt forgiven with respect to a vacation or second home, business property, or rental property.

Also, the mortgage debt exclusion may not fully apply in the case of a mortgage which has been refinanced. Refinanced principal residence debt is eligible for the exclusion up to the amount of the previous mortgage before the refinance.

And there may be further complications in any given situation -- don't confuse the issue of debt reduction (and how it's taxed) with any actual gain which might still arise on the sale of the house. In short sales, taxpayers might sustain gain from the sale of the property instead of or in addition to income from discharge of debt. Of course, another rule (IRC Section 121, allowing some joint filers to exclude gain of up to $500,000 on sale of their residence) might exempt some or all of such gain. It gets complicated. Do-it-yourselfers beware.

Learn more in Nolo's article Canceled Mortgage Debt: What Happens at Tax Time?