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The Arizona Supreme Court, clarifying the breadth of coverage of the anti-deficiency provisions of ARS §33-814(G), decided that the borrowers remained liable on the shortfall on a loan that secured raw law the borrower claimed they intended to build a residence on in the case of BMO v. Wildwood Creek Ranch, Arizona Supreme Court Docket No. CV-14-0101-PR. In doing so, the court also overruled the Court of Appeals ruling in M & I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (App. 2011)

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In addition to the extenders package, the House added on a new provision that was tagged onto the extenders bill under the “Achieving a Better Life Experience (ABLE) Act of 2014.” The bill creates a new type of account (ABLE account) that may be established for eligible individuals.

Eligible individuals must be blind or severely disabled (determined under Social Security definitions) and must have become so before turning age 26. However, a person does not have to be receiving benefits under Supplemental Security Income (SSI) or Social Security Disability Insurance (DI) in order to qualify for the account, nor will qualifying for a §529A account mean the person is eligible for either of those benefits. [§529A(e)(1)(A)]

Generally, a qualified program established under §529A is exempt from current taxation, though it will still be potentially subject to the unrelated business income tax found at IRC §511 that generally applies to tax exempt charities, assuming it has UBIT income. [IRC §529A(a)]

To be a qualified program, the following requirements must be met:

  • The program must be one established by a State, agency or instrumentality which:
    • Allows individuals to make contributions to the program for the benefit of an individual (referred to as an ABLE account)
    • The ABLE account is established to meet “qualified disability expenses” of the individual
    • No individual may have more than 1 such ABLE account
    • Such accounts can only be established for :
      • A resident of the State in question or
      • A resident of a contracting State
    • Which complies with all other requirements of §529A [§529A(b)(1)]
  • Contributions must be limited as follows:
    • Only cash contributions may be made
    • For each year the total contributions may not exceed the gift tax exclusion under IRC §2503(c) for the year ($14,000 in 2014)
    • Any excess contributions may be returned before the due date of the return for that tax year [§529A(b)(2)]
  • A separate accounting must be provided for each beneficiary. [§529(b)(3)]
  • The program must provide safeguards that generally would prevent the contribution of excess aggregate amounts, based on limits established by the State. [§529A(b)(6)]
  • Neither the contributor nor the beneficiary may direct the investments of the ABLE account [§529A(b)(4)]
  • The ABLE account may not be pledged as security for a loan [§529A(b)(5)]

The tax treatment of distributions to the beneficiary is generally governed under the standard annuity rules of §72 except to the extent the distributions are used to pay qualified disability expenses. [IRC §529A(c)(1)(A)] Such excess payments will be subject to an additional 10% tax unless they are paid following the death of the beneficiary or are timely returns of overcontributions. [§529A(c)(3)]

In applying the annuity rules of §72 to determine the amount potentially taxable:

  • All distributions made during the year shall be combined and treated as one (except as provided otherwise by Regulations the IRS may issue) and
  • The value of the contract, income on the contract and investment in the contract shall be computed as of the end of the year (except as to be provided in Regulations the IRS may issue) [§529A(c)(1)(D)]

If total distributions for the year do not exceed the eligible individual’s qualified disability expenses for the year, the entire distribution will be exempt from tax. If the distributions exceed that amount, the amount otherwise includable under the annuity rules will be reduced by an amount equal to the ratio of qualified disability expenses to total distributions. [§529(c)(1)(B)]

Qualified disability expenses are defined as any expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary. The law cites specific examples, which include:

  • Education,
  • Housing,
  • Transportation,
  • Employment training and support,
  • Assistive technology and personal support services,
  • Health,
  • Prevention and wellness,
  • Financial management and administrative services,
  • Legal fees,
  • Expenses for oversight and monitoring,
  • Funeral and burial expenses,
  • Other expenses

The expenses must meet the requirements of the (to be written in the future) regulations and consistent with the purposes of such ABLE accounts.

Amounts can be rolled tax free from one ABLE account to another. A distribution will qualify for tax free rollover if the amount of the distribution is paid into another ABLE account no later than 60 days after the distribution. The ABLE account must be for the benefit of the same eligible beneficiary or another eligible individual who is a member of the family of the original beneficiary. [§529A(c)(1)(C)(i)] However, if the transfer occurs within 12 months from the date of a previous transfer to a qualified ABLE program the beneficiary it will not qualify for tax free rollover treatment—so, like IRAs, there is a “once per 12 months” limit imposed. [§529A(c)(1)(C)(iii)]

Similarly, the beneficiary of the ABLE account can be changed during the year to another eligible individual who is a member of the family of the original beneficiary. [§529A(c)(1)(C)(ii)]

A “member of the family” means a brother, sister, stepbrother or stepsister. The same rules that apply for treating adopted children as having any of those relationships for purposes of determining dependents under §152 shall be used for this purpose as well. [§529A(e)(4)]

Special gift tax rules are provided for amounts paid into the ABLE program on behalf of the beneficiary. The gift will be treated as a completed gift of a present interest in the property and it will not be treated as a transfer excluded from gift treatment for payment of educational or medical expenses of the beneficiary under IRC §2503(e). [§529A(c)(2)(A)] Distributions from the ABLE account will not be treated as a taxable gift. [§529(c)(2)(B)]

A change in the beneficiary of an ABLE account will be potentially subject to both gift and generation skipping transfer taxes unless the new beneficiary is an eligible individual and a member of the family of the original beneficiary. [§529A(c)(2)(C)]

If more than ABLE account is established for the same individual, only the first account to be established for the eligible individual will be treated as an ABLE account. Therefore, none of the others will have tax free status for the income of the account. [§529(c)(4)]

The ABLE program will be required to report to the IRS and designated beneficiaries reports with respect to:

  • Contributions
  • Distributions
  • Return of Excess Contributions
  • Any other information the IRS may require [§529(d)(1)]

The trustee of the ABLE account will also notify the IRS upon the establishment of an ABLE account giving the name and state of residence of the designated beneficiary, as well as any other information the IRS may require. [§529(d)(3)]

Excess contributions to an ABLE account will be subject to the excess contributions tax on retirement accounts found at IRC §4973. [§4973(a)(6)] That tax is set at 6% per year on the remaining over-contribution to the account.

Each State will also be responsible for submitting monthly reports to the Social Security Administration statements on relevant distributions and account balances of ABLE accounts. [§529A(d)(4)]

States which do not establish an ABLE program may contract out the operation of such a program to another state that does administer such a program. [§529A(e)(7)]

When the beneficiary of an ABLE account dies, the funds in the ABLE account generally pass to the sponsoring State. However, the amount distributed to the state does not include:

  • Outstanding payments due for any qualified disability expenses
  • Amounts in the account in excess of total medical assistance paid for the beneficiary after establishment of the account (net of any premiums paid to a Medicaid Buy-In program). [§529A(f)]

Any balance that does not go to State would be distributed to the deceased’s estate or a designated beneficiary. The amount of investment earnings would be subject to income taxes, but the 10% penalty would not apply.

Section 4 of the Act provides the rules for the partial or full exclusion of such amounts from determinations of eligibility for various programs. The law exempts the first $100,000 in ABLE account balances from counting towards SSI’s $2,000 individual resource limit, though account distributions for housing expenses would be treated as income for SSI qualification purposes.

Note – at the time this post was written the Senate had not yet taken up this bill.  While the overwhelming vote in the House suggests its likely that the Senate will eventually pass this bill (or that it will pass early in the next Congress), nothing is ever certain where Congress is concerned.  But advisers certainly should be aware of this program, as well as what it does (and does not) accomplish for clients.

In a recent court case, the taxpayer who argued that by living in Germany for many years and selling his US properties a long time back, he had relinquished his Lawful Permanent Residence (LPR) or a green card and hence should not be subject to US taxes on his income. However, IRS did not accept this and court agreed with IRS making the taxpayer liable for the tax.

IRS contended that the taxpayer was liable for income tax deficiencies for 2004 and 2006 – 2009 (almost all of which was attributable to the gain on his installment sale of stock). IRS argued that (1) because the taxpayer did not formally abandon his LPR status (obtained in ’77) until 2010, he remained an LPR during the years in issue, and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under Article 4 of the Treaty. Therefore, he was not exempted from U.S. taxation by the Treaty.

The Tax Court reasoned that the taxpayer did not formally renounce or abandon that status until Nov. 10, 2010, when he filed a Form I-407 and surrendered his green card to the USCIS consistent with the requirements of Reg. § 301.7701(b)-1(b)(3).The Court rejected the taxpayer’s argument that he “informally” abandoned his LPR status. The Court held that for Federal income tax purposes, the taxpayer’s LPR status turns on Federal income tax law and was only indirectly determined by immigration law. The taxpayer’s reliance on an immigration case that recognized “informal” abandonment was misplaced. Unlike immigration law, the Code and regs were not silent on the point at which a taxpayer’s LPR status was considered to change. The requirements set out in Code Sec. 7701(b)(6)(B), Reg. § 301.7701(b)-1(b)(1), and Reg. § 301.7701(b)-1(b)(3) for abandoning LPR status

As certain as I am that General Hospital will exceed 13, 125 episodes, as a CPA, you will be asked to serve on a governing board of a nonprofit. Serving on a nonprofit board is a big commitment. The question you need to ask yourself is, are you ready? Continue Reading »

In PLR 201431036 (http://www.irs.gov/irs-wd/201431036.pdf) the IRS granted relief from the 60 day rollover period to a taxpayer who intended to take funds out of the IRA to benefit from a short term investment opportunity—the type of situation that advisers might expect would not lead to an IRS waiver of the rollover period. As you might expect, though, the particular facts of this situation was likely key to obtaining relief.

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In the case of Schumann v. Commissioner, TC Memo 2014-138, http://www.ustaxcourt.gov/InOpHistoric/SchumannMemo.Kerrigan.TCM.WPD.pdf, a number of issues related to passive activities and rental real estate were before the court.  However an interesting issue arose as a taxpayer discovered that positions taken in one legal proceeding can come back to haunt the taxpayer in another.

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If a taxpayer sells a rental property formerly used as the taxpayer’s principal residence that has been used as a rental, there is the possibility that §121 may be available to be used to exclude gain from the sale of the rental.  But if the rental activity has unused passive losses, does invoking §121’s gain exclusion prevent the ability to release the excess losses under IRC §469(g)(1)’s special rule for dispositions?

Generally, IRC §121 allows for exclusion of up to $250,000 of gain ($500,000 for a married couple filing a joint return) from the sale of property that was owned and used by the taxpayers as their principal residence for two of the five years immediately before the sale.

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