FEDERAL INCOME TAX LAW ADVICE
PART I
|
|
I have a national tax advice consulting practice. I charge $150/hour for tax advice, tax research, and problem resolution.
|
|
|
|
|
|
|
|
|
|
|
|
ANSWER: The basis in property received as a gift is normally the donor's basis. If the client had received his father's house by testimentary transfer (through a will), then the client's basis in the property would have "stepped up" to the fair market value at the time of his father's death.
As it stands, the client's adjusted basis will become his father's adjusted basis plus the cost of any permanent improvements to the property completed by the client during the period in which he has held the property.
References:
* http://www.irs.gov/faqs/faq10-1.html
* Publication 551, Basis of Assets
* Publication 950, Introduction to Estate and Taxes
Based on the foregoing, the client's basis in the property, which he received as a gift from his father for $1, is his father`s adjusted basis in the property at the time of transfer. One complication added at the end, in my last phone call with the client. The father deed the property to his two sons. Therefore, our client received a gift of 1/2 of the property and his basis is 1/2 of his father`s adjusted basis at the time of the property gift transfer.
Michael A. S. Guth, Ph.D., J.D.
Tax Advisor
QUESTION 2: I am 56 and am retired and recently took an early 401K withdrawal from a US corporation from which I terminated service in 2004. Given my age and the fact that I no longer work, do I qualify for an exemption to the 10% early withdrawal penalty?
ANSWER: It is easier for me to collect some information in writing, rather than explain the provisions of the Internal Revenue Code (IRC) over the phone. Basically, you are asking if there is any way for you to avoid the 10% early withdrawal penalty on funds you have already withdrawn from your 401(K) plan.
There is good news and bad news for you to digest. I will start with the good news.
GOOD NEWS
Section 72(t)(2)(A) of the Internal Revenue Code provides limited exceptions for withdrawals of retirement plan funds without incurring an early withdrawal penalty. You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:
· You become totally disabled.
· You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
· You are required by court order to give the money to your divorced spouse, a child, or a dependent.
· You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
· You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)
Employers are not required to offer these types of hardship withdrawals; however, the IRS will allow them to code the withdrawals as penalty-free if one of those five exceptions are met. Therefore, you would need to contact your 401(K) plan administrator and specifically refer to Section 72(t)(2)(A)(v) of the IRC. Your 401(K) plan administrator will be able to tell you if it permits former employees to utilize the provisions for penalty-free withdrawals under Section 72(t) (2)(A).
BAD NEWS
You indicated that you separated from your employer in 2004, when you would have been about 53 years old. The “separation from service” exception applies to people who were age 55 or older in the year of separation, not necessarily at the moment of separation.
If you had separated from service when you were 55 or older or during the calendar year in which you turned 55, you could receive the lump sum distribution now without being subject to the 10% tax. But in your case, because you were age 53 at the time of separation, it appears the “separation from service” exception does not apply to you.
Thus, if you had separated from service after attaining age 55, the 10% penalty tax would not apply. Likewise, if you had separate from service at age 54 and you attained age 55 during the same calendar year of the separation, the 10% penalty tax would not apply. See Notice 87-13, 1987-1 C.B. 432, Q&A-20. It appears you cannot benefit from this exception by separating one or two years before you reached age 55.
The legislative history with respect to Code section 72(t) indicates that this exception to the penalty tax will NOT apply if the employee separates from service in a year prior to the year he or she turns 55 (for example, at age 52) and begins receiving benefits after attaining age 55. Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, P.L. 99-514, 99th Cong., 717 (May 4, 1987); H.R. Rep. 841, 99th Cong., 2d. Sess., Vol II, Title XI, 456 (1986). A 1992 IRS private letter ruling appears to confirm this position. Priv. Ltr. Rul. 9224056 (3/20/92). In an earlier private letter ruling, however, the IRS concluded that the exception would apply to a participant who retired at age 50 and began receiving distributions after attaining age 55. Priv. Ltr. Rul. 9135060 (6/7/91). Given the legislative history and the more recent IRS ruling, however, it appears that the earlier ruling was an anomaly.
CONCLUSION
If you wish to avoid the 10% early withdrawal penalty on your 401(K) distribution, the key is convincing your plan administrator to file an (amended) information return with the IRS indicating your 401(K) distribution should be treated as a penalty-free withdrawal. Based on the facts provided in your inquiry, your plan administrator will likely tell you that your distribution does not qualify for the IRC “separation from service” exception. But you have nothing to lose by asking your plan administrator to determine if you qualify for this exception.
Michael A. S. Guth, Ph.D., J.D.
Tax Advisor
QUESTION 3: What are the IRS requirements for filing for a disability exemption from the IRS 10% early withdrawal penalty from a 401k plan? Would severe chronic,demonstratable alcoholism qualify for this ?
ANSWER: Disability is one of a handful of situations where you can tap your 401K before age 59 1/2 without incurring the 10% early-withdrawal penalty. To qualify for the disability exemption, you must be able to prove that you have a physical or mental condition that will last indefinitely, and that you`re unable to work because of this disability. A search of the Tax Court cases database showed no case in which alcoholism qualified -- but in fact the issue has never been raised before.
Normally, people with disabilities qualify for "handicapped placards" to hang in their cars and park at special handicapped parking. That would not be the case for alcoholism, so my judgment is this is not the kind of illness that the IRS would consider disabling. Treatment centers for alcoholism exist; it probably would not qualify as a short term disability.
A separate issue relates to how the information is reported to the IRS. To avoid the penalty, you would need to supply the institution that handles your 401K with medical records proving your ailment. That institution would then code your 401K withdrawal in such a way that it would not trigger the automatic penalty. In your case, the information return has already been generated. Therefore, the IRS will feel justified in assessing a penalty, because it will assume you were unable to convince your 401K custodian that you qualified for the exemption.
Michael A. S. Guth, Ph.D., J.D.
Tax Advisor
QUESTION 4: Per our recent phone conversation, I am including the details from the 1099-B form that I received from Ameritrade.
There are two items that I'm having trouble with:
2/17/06 Placer Dome Inc Contra-Do Not Sell 725906978 Tender 300 shares $753
3/10/06 Barrick Gold Corp Com 067901108 Cash in Lieu 0 shares $26.66
My monthly statement for 3/10/06 states Cash in Lieu of Fractional Shares (ABX)
I originally purchased 300 shares of Placer Dome Gold (PDG) on 5/28/02 for a total of $4000, including commission. Thus, my original cost basis is $4000. In 2006, Barrick Gold purchased Placer Dome Gold and I received cash plus Barrick Gold (ABX) stock in exchange for my Placer Dome shares. I received the $753 + $26.66 shown above plus 220 shares of Barrick Gold stock in exchange for my 300 shares of Placer Dome stock.
Please explain to me how I should report this transaction on my 2006 1040 and Schedule D tax forms.
ANSWER: You have received a like-kind exchange of stock in one company (PDG) for another (ABX) with cash to boot. Apparently, in purchasing PDG, ABX offered both its own stock and cash.
Because you have not decided to sell your ABX stock, you have not realized the capital gain or loss on your original transaction. The like-kind exchange of stock is a non-taxable event. In this case, the boot should be used to reduce your basis. See IRS publication 544: "Money paid. If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. The basis of the property received is the basis of the property given up, increased by the money paid."
Your original basis was $4,000 for the PDG stock, which is now your basis for the ABX stock. You have now received $753 + $26.66 = $779.66. You should reduce your basis in the ABX stock by $4000 - $779.66 = $3220.34.
When you ultimately sell your ABX stock, you should record $3220.34 as the basis for your stock. I recommend that you print out a copy of this email message and place it directly behind your Schedule D form, so the IRS will know you were aware of the two transactions and have adjusted your basis accordingly.
Michael A. S. Guth, Ph.D.,J.D.
Tax Advisor
(865) 483-8309