Attorney-at-Law

PROHIBITED SAVES THE DAY

In Uncategorized on 04/10/2018 at 16:43

When the owner of an IRA hears that they’ve made a prohibited transaction, there is usually weeping, wailing and gnashing of teeth. This unhappiness is engendered by Section 408(e)(2(A), which obliterates the account as an IRA from Day One of the tax year wherein the prohibited transaction occurs. This results in all gain being taxable to the owner.

But if the prohibited transaction took place far enough back to knock out 6SOL, IRS may be relegated to picking up only recent unreported gain.

Stacey S. Marks, 2018 T. C. Memo. 49, filed 4/10/18, steers around the Scylla of a busted rollover that would have hit her with a $98K taxable gain, the Section 72(t) 10% youth chop (or addition to tax), and the 20% substantial understatement chop.

Whether there’s a Charybdis of unreported income within the SOL is another question.

Eight (count ‘em, eight) years before the year at issue, Stacey lent her father $40,000. Only she didn’t; her IRA advanced the money, and got a promissory note from Dad.

My sophisticated readers have blown the whistle, thrown the flag, and made the Section 4975 hand signals. Can’t lend to mishpocha (please pardon arcane technical term).

So Stacey’s IRA cratered as of Day One, eight years before year at issue, and entire account was deemed distributed to Stacey on that day.

So when Stacey tried, during the year at issue, to roll her non-IRA over and got caught with a couple notes from the loans her IRA made to Dad and to a friend of hers that the new non-trustee refused to take, she doesn’t owe tax on the FMV of the notes (she got them eight years before when she crashed her IRA), she doesn’t owe the Section 72(t) chop-or-addition (she had no IRA from which to take a distribution in the year at issue), and there was no underreporting of tax for that distribution (because it wasn’t a distribution from an IRA and therefore wasn’t taxable).

So Judge Morrison orders a Rule 155 beancount.

Because Stacey admits she left a $162 dividend off her return.

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