Inherited IRA's, Substantiation and a Bad Deferal Scheme

Mark E. Stroff v. Commissioner, TC Memo 2011-80


This was a run of the mill substantiation case, with an unusual feature.  The Tax Court went with the Service on disallowing many expenses but they allowed casual labor expenses to some extent with fairly minimal proof.

 Self-employed handyman was granted partial Code Sec. 162 deduction of claimed “casual labor” expenses: although lacking any proof of actual amounts paid, taxpayer did submit list of laborers that corresponded with names entered in his weekly planner, which was enough to allow Tax Court to make Cohan estimate of deductible amount.

It wasn't a very large number or they probably would have allowed the expenses and gone after him for back-up withholding and 1099 filing penalties.

Andrew R. Bosque, et ux. v. Commissioner, TC Memo 2011-79

There were a couple of issues in this case.  One was the real estate professional issue which is starting to get really tedious.  The main problem was substantiation of time spent.  If you have another profession, I can't emphasize enough how important that is.  The other was an attempt to double dip on the home office deduction. Interestingly they were allowed deduction for amounts paid to para-legals in husbands law practice.  This strikes me as another case where I would be worried about 1099 penalties and back-up withholding.

Home office deductions—principal place of business—multiple businesses— double deductions. Attorney/real estate consultant and wife/nurse weren't entitled to home office deduction for husband's consulting business: deduction would amount to doublecounting because taxpayers had already taken home office deduction for same office space on husband's law practice business's Schedule C.



Attorney/real estate consultant and wife/nurse were denied deductions claimed on husband's consulting business's and law practice's Schedules C for rental or lease of business properties: taxpayers didn't offer any proof of those expenses. But, they were entitled to deduction for paralegal fees that were substantiated with check copies containing names of cases worked on, phrase “paralegal fees,“ and corroborative testimony.
 
Kurt Sollberger v. Commissioner, TC Memo 2011-78
 
One of my favorite comments on some schemes is "Sometimes you should just pay the taxes."  Taxpayer had sold his closely held stock to an ESOP and purchased floating rate notes, which qualified for deferral.  Then he met someone who "loaned" him 90% of the value. 
 
Capital gains—deferred gain on sale of employer securities to ESOP; disposition of qualified replacement property; sale vs. loan. Manufacturing co. owner's transfer of floating rate notes to promoter of ostensible ESOP-QRP loan program was sale triggering deferred gain from prior ESOP stock sale: taxpayer's attempt to treat transfer as loan rather than sale was belied by evidence showing no material distinction between this and other sale cases wherein benefits and burdens of ownership clearly passed to promoter, which didn't then hold notes as collateral but rather immediately sold same and passed 90% of proceeds back to taxpayer.
 
Optech agreed under the MLSA to serve as the lender or as agent for another lender. The MLSA provided that petitioner, as the borrower, remained the beneficial owner of the FRNs posted as collateral during the term of the loan and the FRNs would not be subject to the claims of any of Optech's creditors. The MLSA stated, however, that the lender had the right to register the FRNs in the lender's name, and Optech could “assign, transfer, pledge, repledge, hypothecate, rehypothecate, lend, encumber short sell and/or sale” the FRNs during the term of the loan without notifying petitioner. Moreover, petitioner waived his rights in the MLSA to receive interest and other benefits from the FRNs during the term of the loan, and he could not prepay on the loan.


The question that intrigues me about this is what he did with the $900,000.  If it was used for personal purposes then this deal would have been a bad deal even if it had worked since he would still be picking up the supposed interest on the notes, without having a corresponding deduction.  Even if the interest was deductible as investment interest it still would not have been a wash because of the effect on AGI.  Also even if the plan worked he was giving up something like half of his "savings" (and it was actually just a deferral) depending on what state he lived in.


IN RE: JOHNSON, Cite as 107 AFTR 2d 2011-XXXX

The whole discussion is a bit lawyerly for me, but the result is an important one.  Inherited IRA's that were rolled over are exempt assets under federal bankruptcy law.

The Trustee, however, argues that the Inherited IRAs do not constitute “retirement funds” because they do not contain any contributions from the Debtor. 11 U.S.C. § 522(d)(12), however, contains no such requirement. “ Section 522(d)(12) requires that the account be comprised of retirement funds, but it does not specify that they must be the debtor's retirement funds.” Nessa, 426 B.R. at 314. The plain language of a statute is determinative under federal law. Patterson v. Shumate, 504 U.S. 753, 757, 112 S. Ct. 2242, 2246 (1992). By its plain terms, all that the Bankruptcy Code requires is that the funds at issue be retirement funds. Even though the Inherited IRAs do not contain the Debtor's own retirement funds, they were originally deposited by his parents as retirement funds and retained their status as such when properly transferred to the Debtor's account in compliance with the IRC.