June 2014 - In This Issue:

 

  

 

 

   

 

 

 
IRA's
Supreme Court Weighs-in on Rights of Creditors
business-see-saw.jpg How far a creditor can go to reach certain retirement assets of a bankrupt individual has long been the subject of tax and non-tax court battles. In a recent U.S. Supreme Court case, the Court concluded that the creditors of a bankrupt individual could attach the assets of an inherited IRA. The case involved a woman who inherited her mom's IRA and later went bankrupt. Her creditors sought the assets in the inherited IRA to satisfy the woman's debts. The Supreme Court ruled against the taxpayer here and offered three reasons for its ruling. First, the heir cannot make any additional contributions to the account for her own retirement; second, the heir must withdraw a minimum amount from the IRA shortly after the original owner's death; and third, the heir can withdraw the entire balance at any time without penalty. The Court also looked at the Bankruptcy Code's careful balancing of exemptions between both debtor and creditor interests. It concluded that inherited IRA funds constituted a "pot of money" freely available for current consumption rather than retirement funds (Clark v. Rameker).
More on IRA's
Investing in Real Estate can be Risky
dice-stock-listing.jpg The owner of a self-directed IRA wanted to purchase real estate with funds in the account, but the custodian did not allow real estate investments. Motivated by what the owner thought was a below market asking price, he developed his own plan by having the custodian wire funds from his IRA directly to the title company handling the sale transaction. As part of that transaction, he named the IRA as the property owner. After two year, he sold the land and transferred the cash proceeds back to his IRA. The taxpayer argued the purchase was a trustee-to-trustee transfer and thus, was not taxable. The Tax Court disagreed and sided with the IRS that the purchase of the real estate was in effect, a distribution taxable to the IRA owner; and because he was under age 59 �, he owed a 10% early distribution penalty (Dabney, TC Memo. 2014-108).
Real Estate
Taxpayer can Deduct Lease Termination Payment
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An Appeals Court ruled favorably for a taxpayer by allowing it to deduct part of the purchase price of the building as excess lease payments. The business purchased its operating facility after deciding the rent it was paying was too high. The lease contained an option whereby the tenant could purchase the building and so the taxpayer/tenant exercised the option. The taxpayer claimed a business expense for the amount of the purchase price that exceeded the fair market value of the building. The IRS said the entire purchase price needed to be capitalized, but the Appeals Court said the taxpayer could deduct the amount which was payment for terminating the lease (ABC Beverage, 6th Cir.). The Service will continue to litigate this issue in other Appeals Courts using the reasoning from a previous case in which it received a favorable result involving a different taxpayer with similar facts. 

Foreign Reporting
Expanded Relief for Certain Violators
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Through a recent internal release (IR 2014-73) the IRS announced expanded relief for "nonwillful" violators who failed to report their foreign financial accounts. In two separate Fact Sheets (2014-6 and 2014-7 issued on June 18, 2014), the Service outlined the changes to the offshore compliance program. U.S. citizens who reside overseas that come in voluntarily will get all penalties waived. U.S. citizens living in the U.S. will face a 5% fine. Both easings begin July 1st and include taxpayers already in the Offshore Voluntary Disclosure Program (OVDP). However, stiffer penalties face those who are willful violators, such as when the foreign financial institution is under investigation. Starting on August 4th, the current 27.5% penalty increases to 50%.

 

And beware of the not-so-obvious foreign accounts as in the case of internet gambling. A poker fan gambled over the internet and opened accounts on poker websites that were maintained outside the U.S. The "professional" gambler was able to deposit and withdraw money and maintain balances in the accounts. Because the gaming sites operated as bank accounts in foreign jurisdictions, they were subject to the foreign-account reporting rules (Hom. D.C., CA). 

We appreciate your feedback on our efforts to raise awareness of tax issues that affect you and your business operations.

 

If you have any questions, please contact your Meaden & Moore representative or Pete DeMarco at (216) 241-3272 or pdemarco@meadenmoore.com.

 

Thank you, 

Meaden & Moore

ABOUT MEADEN & MOORE

 

Since 1919, Meaden & Moore has been providing accounting, tax, forensic and business consulting services to a wide array of clients in a variety of industries. Through careful examination of the issues affecting business success, our staff of CPAs, CFEs, advisors, and auditors develop strategies and solutions to help our clients thrive in today's global economy.

 

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