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mgmea

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  1. Does your client have a copy of the QDRO? A couple of lines in the property settlement agreement does not constitute a QDRO. I've always been told by attorneys that a QDRO is a separate document prepared by the attorney and then signed by the judge and then submitted to the plan administrator. The QDRO document must meet very stringent requirements under ERISA for it to be affective. In every QDRO distribution I've ever seen, the 1099R is always issued to the alternate payee, who in this case would be the wife. I get the impression from what you've disclosed here that your client's attorney doesn't quite know what he or she is doing. I would have your client ask her attorney for a copy of the QDRO. When she gets a blank stare back when she asks for it, I personally would tell the attorney that they are going to fix this by amending the property settlement for free so that she can file MFS(HOH) and get stuck for only half the taxes caused by the attorney's screwup. But that's just me, your client may not be as upset as I would be if I were in her situation. What does your client's divorce decree say about filing status for 2009? Believe it or not, I have a client coming in who swears her divorce decree required them to file MFJ for the year the divorce was final, when the divorce was final in August of 2007, and that's the way they filed.
  2. This keeps getting better all the time for the stepped up basis. It sure looks like the parents retained an income interest in the cropland, doesn't it? Lets step that basis up too. From what has been presented in this post by the OP it looks to me like the parents were counseled by someone experienced in transferring assets to qualify for Title 19 and get a stepped up basis for these assets at the same time. Can the OP talk to whoever set this stuff up for them? Ask the LLC return preparer if they are familiar with Sec 2036 and 1014. If the LLC return preparer thinks the $1 sale price on the deed makes this a bonafide sale they are in over their head. I'd ask them what reasoning they used if they didn't conisder this a transfer subject to Sec 2036. There may be a fatal flaw in here somewhere that we aren't aware of which doesn't make this transfer subject to Sec 2036. Please keep us posted. PS: I believe there is something in the regulations for Sec 1014 that the stepped up basis is adjusted for depreciation taken. You'll have to check out what depreciation this is, I think it is depreciation taken by the donee(the LLC) after the transfer, but I'm not sure.
  3. >>And the reason the government won including it in the estate was because it was "gift" property where title had passed.<< That's a requirement, but not the reason it was includible in the gross estate. Sec 2036(a)1 requires a lifetime transfer by the decedent for less that full and adequate consideration. A gift of a farm to the children where title has passed to the children meets this requirement. Just because the farm was gifted though won't get it included in the gross estate. To be included in the gross estate (to paraphrase 2036(a)1): the parent (transferor) must retain the possession or enjoyment of the gifted property for a period that ends with their death. What the IRS sucessfully argued was that an implied agreement that the parents would occupy the home until they died constituted a retained possession or enjoyment of the gifted property within the meaning of Sec. 2036. This sounds like the factual situation of the OP to me, but only for the farmhouse portion of the gift, not the cropland portion of the gift. I don't feel that the transfer to the LLC presents any problem. There are numerous court cases where the parent transferred property to a limited partnership which in turn transferred it to another limited partnership, etc.. If the parent retained their interest per Sec. 2036 after these transfers, the property was included in the gross estate. I think that the IRS would have a hard time arguing that the parents in the OP didn't retain their possession or enjoyment of the farmhouse after the transfer to the LLC because they actually lived in the farmhouse until their deaths. Here's a link to an article that cites court cases and revenue rulings that are applicable to these situations: http://www.bjflaw.com/docs/medicaid_tax_rules_medicaid.html
  4. >>I do agree that if gifted the original basis of the farm would carry over the kids.<< Why do you think the basis would carry over? Don't you think that there was an implied aggreement that the parents would occupy the farmhouse until they died? Why do you think that this implied agreement doesn't constitute a retained interest under Sec 2036? >>We all know if the value of the farm was enough to cause a tax due from inheritance the gov would null the sale. << The government doesn't have the power to "null the sale", at least not yet. What they do have is the power to properly apply Sec 2036 because there was a retained interest when the parents gifted the farm to their children. There is a question of whether that retained interest included the whole farm or just the farmhouse. There are dozens of cases regarding this that the governement won and the gifted property was included in the gross estate. For those less astute being included in the gross estate is what gives the property the stepped up basis. Herea are a few of the court cases I'm referring too: In Guynn v United States, 437 F.2d, 71-1 USTC Par. 12,742 (4th Cir. 1971), the decedent, an eighty year old woman, conveyed a residence to her daughter but remained in the residence without an express agreement that entitled her to do so, paid no rent to the grantee, and paid for improvements and certain expenses. The decedent's grantee, her daughter, testified that the decedent's remaining in the property was not discussed because it was understood by all involved that she would stay in the property until her death. The Fourth Circuit held that the property was included in the estate based on an implied agreement for a retained life estate. Section 2036(a)(1) applies if there exists at the time of the transfer of property an agreement, either express or implied, that the transferor will retain possession or enjoyment of the property transferred, even if the transferor has no legally enforceable right to do so. Guynn v. United States [71-1 USTC ¶12,742], 437 F.2d 1148, 1150 (4th Cir. 1971); Estate of Rapelje v. Commissioner [Dec. 36,388], 73 T.C. 82, 86 (1979); Estate of Honigman v. Commissioner [Dec. 34,039], 66 T.C. 1080, 1082 (1976); Estate of Barlow v. Commissioner [Dec. 30,627], 55 T.C. 666, 670 (1971). I would argue that the parents retained an interest in the farmhouse under the meaning of Sec 2036. Based on the dozen or so court cases I've read with a similiar fact situation, the tax courts would agree also I believe. I don't think that the LLC presents a problem because all it's members were their children, correct? The children could still have an implied agreement with the parents even considering the LLC because they controlled the LLC. I wouldn't argue that the parents retained an interest in the crop land that produced the rental income though. I would suggest that the OP would carefully read at least the court cases I've outlined here. If you still think a gift is always a gift after reading them, I give up.
  5. A formal life estate is not required for Sec. 2036 to be applicable. All that is required is a transfer of property for less than FMV and a retaining of an interest in that property. The courts have ruled dozens of times that a formal life estate is not necessary to retain an interest in the transferred property. Here is an excerpt from Peck v. United States 65-2 USTC: "[implied Agreement]. From these facts the Commissioner determined that an implied agreement or understanding existed between the decedent and the son that she would continue to live on the property and consider it her home for the rest of her life. The plaintiff contends that there was no such agreement, either express or implied, or silent, or tacit, or of any other type. The determination that an implied agreement or understanding existed is presumed to be correct and the burden is on the plaintiff to show by the greater weight or preponderance of the evidence that no such implied agreement or understanding existed. The Government here does not dispute the fact that the deed to the property showed the full legal title in the name of the plaintiff, Col. Peck. Nor does it contend that there was any written agreement between the decedent and Col. Peck stating that she would live on the property. Of course, no such written agreement is necessary in order for the Government to prevail on this question, but an implied or tacit or silent understanding to that effect is necessary for the Government to prevail." The goverment prevailed in this case and the house was included in the gross estate. The court case results that a formal life estate is not required for a retained interest to exist is so widespread that it is even reflected in the instructions to Form 706. In the case at hand, the parents transferred the farm for $1 with the implied agreement that they could live in the house until they died. How is this not a transfer for less than FMV with a retained interest?
  6. >>"Any such parent minor "remainder interest" would have been irrelevant. You can't get to inheritance (with a stepped-up basis) from what is truly given and accepted." << Where's Bob Kamman when you need him? That the parents continued to live in the farmhouse is not irrelevant. It's the $64,000 question that gets you the stepped us basis. The applicable code section here is: SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE. 2036(a) GENERAL RULE. --The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death -- 2036(a)(1) the possession or enjoyment of, or the right to the income from, the property, or The question now becomes "what did the parents retain the possession or enjoyment of"? The farmhouse for sure, so we step that basis up. The rest of the farm might be a good question for the tax court. Maybe they've already decided that one. I can't recall all of the court cases that were brought up the last time this was discussed on the old ATX board, I'm sure Bob could though.
  7. Distirbutions received by an alternate payee under a QDRO that are not rolled over to an IRA are NOT subject to the 10% early distribution penalty under exception 06 of Form 5329. The problem is that this distribution does not appear to have been done under a QDRO. If the attorney advised in writing that this was going to be a QDRO you may want to consider having the attorney pay the 10% penalty.
  8. I would like to correct a misstatement I made in the earlier thread. The recently signed stimulus bill did not contain 9000 earmarks. The stimulus bill was officially earmark free, although I personally feel that Harry's multi-billion dollar train set doesn't pass the smell test. The almost 9000 earmarks are contained in the recently House passed $410 billion spending bill. To be fair, Obama has not yet signed this bill as it has not made it's way through the Senate. The excrement to electricity funding is definitely an earmark in the House $410 billion spending bill. It doesn't involve methane generation from cows, we've already spent millions on researching that and it already is a commercially viable technology. This research may be worthwhile, but I'm sure much of the other almost $8 billion of earmarks slipped into the $410 billion spending bill aren't. The problem is that there is no scrutinty of these earmarks to separate the good from the bad. Obama the candidate pledged to eliminate earmarks when he was elected. Let's see what he does with this bill when it crosses his desk.
  9. I'm not using ATX this year. I transmitted a bunch of 4868's yesterday afternoon and evening, all were accepted by this morning. Looks like this is an ATX problem.
  10. Might not Ohio be one of those rare states that has legal separations available as an alternate to divorce? I've never seen a legal separation personally, but the phrase is "divorced or legally separated" isn't it? Some more investigation might be in order to rule out that they are not "legally separated" under state law and thus considered single.
  11. >>Forget the rental situation, even though parents pay kids each month.<< I would think long and hard before advising any one to overlook $25,000 of potential rental income on the children's tax return. It appears that the kids legally own the house and are the only ones on the mortgage and that the kids are writing out a check to the bank each month and are in return receiving a check from the parents? Advising anyone to overlook the check from the parents to the kids each month is a sure way to get yourself a $5000 preparer negligence penalty. There are numerous court cases where the parents in this situation have been held to be "beneficial owners" and have been allowed to deduct the mortgage interest and real estate taxes. A problem for you might be that in most of these court cases the parents paid the mortgage directly to the bank as I recall. I would look into these numerous court cases regarding "beneficial owners" and go from there. If you decide beneficial ownership doesn't fit, then you've got a classic case of a rental situation. If rent is FMV, then it goes on a Sch. E. If rent is not at FMV, then line 21 and Sch A for expenses. In no case would I advise the kids taking the $25,000 deduction for interest and taxes and just forgeting about the $25,000 worth of checks from the parents. They can't have their cake and eat it too.
  12. True, but the IRS is making a big deal out of this. In their recently issued notice, the exact number escapes me right now, they state that if the premium is not on the employee-shareholder's W-2, no deduction is allowed for the corporation. This is on their hit list. The very real possibility of a $5000 penalty on the preparer for disregarding the IRS notice has made a believer out of me.
  13. I wouldn't recomend this strategy. You would be preparing the return taking a position directly contradictory to Treasury Regulation 1.121-1, quoted here; "C) Sale or exchange of vacant land before dwelling unit. If the sale or exchange of the dwelling unit occurs in a later taxable year than the sale or exchange of the vacant land and after the date prescribed by law (including extensions) for the filing of the return for the taxable year of the sale or exchange of the vacant land, any gain from the sale or exchange of the vacant land must be treated as taxable on the taxpayer's return for the taxable year of the sale or exchange of the vacant land. If the taxpayer has reported gain from the sale or exchange of the vacant land as taxable, after satisfying the requirements of this paragraph ((3) the taxpayer may claim the section 121 exclusion with regard to the sale or exchange of the vacant land (for any period for which the period of limitation under section 6511 has not expired) by filing an amended return. " If the house didn't sell, when you amended the return you would be admitting to an underpayment on the original return caused by taking a position that negligently or willfully disregarded a Treasury rule or regulation. This would get the preparer a $1000 or $5000 fine without even having to go through an audit. The OP could apply for an extension and hope the house sold before 10/15/2008. That would be my choice.
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