In Uncategorized on 02/23/2015 at 16:20

Sort of a coda to 44 USC§3501 et seq. today from STJ Lewis (“Champion Speller”) Carluzzo in a small-claimer, Gustavo E. Morles, 2015 T. C. Sum. Op. 13, filed 2/23/15.

Gus is younger than 59-1/2 years old, out of work and about to be evicted when he draws down his 401(k), his employee stock purchase plan, and Trad IRA (which he had funded with a non-deductible contribution) to preserve hearth and home. Of course, he loses when he claims drawdowns aren’t taxable, and he’s in line for the 10% chop as well.

“Although we sympathize with petitioner, we agree with respondent that the entire plan distribution is includable in petitioner’s 2010 income under section 72(a) and (e). Accordingly, respondent’s adjustment to that end is sustained.” 2014 T. C. Sum. Op. 13, at p. 5.

Now as to the Trad IRA, Gus’ investment in the contract is taken into account when reckoning what gain, if any, Gus got on the distribution. Investment in the contract is Section 72(c) language for basis. And nondeductible contributions to Trad IRAs are investment in the contract (or basis).

Now those of us with bases in Trad IRAs are now, or will soon be, struggling with this year’s Form 8606, after digging out Forms 8606 going back many years, and going through the convoluted hopscotch of said form, to extrapolate the miniscule allowable basis for the current year. And paid preparers will be asking for those forms from new clients.

But is this all necessary?

STJ Lew isn’t so sure: “Nondeductible contributions made to an individual retirement account must be reported annually on Form 8606, Nondeductible IRAs. See sec. 408(o)(4). The Form 8606 instructions state that a taxpayer must keep copies of records, including completed Forms 8606 for previous years, in order for the taxpayer to verify the nontaxable portion of the individual retirement account withdrawal or distribution. Although nothing in the record suggests that petitioner has complied with these reporting requirements, nothing in the statutory scheme suggests that a taxpayer who fails to satisfy these reporting requirements cannot include nondeductible individual retirement account contributions in the taxpayer’s investment in the contract. Taking into account the evidence that sufficiently shows the relevant transactional history of the IRA, we find that petitioner’s initial contribution to the IRA is taken into account in the computation of his investment in the contract for purposes of section 72.” 2015 T. C. Sum. Op. 13, at pp. 6-7.

Now Gus claims that, as he put in $1K nondeductible and nothing else,  and took out less than that, the whole distribution is nontaxable; IRS claims it all is. STJ Lew says there has to be an allocation, cites Section 72(e) and tells the parties to work it out in the Rule 155.

Now curb your enthusiasm, guys, before you start shredding those old Forms 8606, or leaving them off your current 1040. This is a small-claimer, can’t be cited as authority (Section 7463(b) says so), and STJ Lew cites no authority but his own peek at Section 408(o) and the Form 8606 instructions.

So if you go ahead and shred, don’t cite or Gustavo Morles when IRS comes to shred you.

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