DANRVAN

The early distribution exceptions from Qualified Plans (including IRAs) are found in Section 72(t). The exception specifically mentions distributions “attributable to the employee's being disabled.”

Since the code does not mention spouse, I don’t think you have a case.

There was only one form but the error message was saying otherwise. The form was corrupted even though it was up to date. I had to manually force it to update.

Thanks for your response TAXMAN.

Error reads “Filer is limited to one form 5329”. There is only one 5329. I tried deleting it and reloading it, updating program, closing and reopening. Has anyone else had this problem?

Jump to the worksheet and you will see a check box at the top that will calculate the 80%.

My designation is Cowboy Practicing Accountant.....

All of it is handwritten. The letter from the IRS that they wanted more information before they could process the return was probably the final straw.

It sounds like the original return was never processed. I had a similar situation which was also a handwritten mess. You might get a POA and check the status of the original return by calling the number on the IRS notice.

In the situation I was involved with, a corrected return was sent directly to the IRS department which had it on hold instead of filing an amended return.

He said it was farmland in original post.

I don't now how the smiling face got into my previous post. Past my bed time.

-Here is a website that uses the classic example:

http://www.extension...nts/M1178-7.pdf

-Here is a reference with cites.

Income in Respect of Decedent

Installment contract payments that are unpaid at the time of death of a decedent are income in respect of a decedent (IRD) to the estate or other recipient of the contract [i.R.C. § 453B©]. The total IRD is the excess of the face amount of the remaining installment obligation over the decedent’s basis in the contract at the time of death [i.R.C §§ 453B( and 691(a)(4)].

The remaining gain on the contract is not generally reported on the decedent’s final income tax return [i.R.C. § 691(a)(4)]. Instead, the IRD is reported by the recipient of the payments as the remaining payments are made.

Practitioner Note

Cancellation at Death

An exception applies if the remaining payments on an installment contract are canceled on the death of the contract holder, or if the buyer of the installment contract inherits the remaining payments. When this occurs, the payments are treated as being made in full to the estate in the year of death, and the estate must report the gain on its income tax return.

Installment payments received by a decedent’s estate or other beneficiary are included in gross income in the same way the decedent would have reported them [Treas. Reg. § 1.691(a)- 5(a)]. In other words, an installment contract does not receive a basis adjustment to FMV upon the death of the contract holder.

Good to see you back KC!

I believe this is a situation where the taxpayer “steps into the shoes” of the decedent. If mother had been reporting gain on installment sale, then beneficiaries would do likewise. If son pays off contract to siblings, then entire payment is subject to gross profit percentage.

If son inherited a share of the contract then it really gets interesting! In that situation, his portion of the inherited contract is considered paid on DOD.

This situation is very close to an example used in several estate planning studies and is discouraged because there is no step up basis for installment contracts.

If you need a cite Neil, I will be glad to look it up and post it.

Sounds like he is paying off the contract which his siblings inherited. The land is already his; subject to the contract as I understand it.

Good answer.  My source was an analysis of the tax code.  Digging deeper, I see section 1402(a)(1) makes reference to section 202 of the Social Security Act.

The deduction is limited to the net profit from the business which includes the CRP income whether subject to SE tax or not.

Good question.

Sounds like both to me, see (a) (2) below.

Reg §1.451-6. Election to include crop insurance proceeds in gross income in the taxable year following the taxable year of destruction or damage.

Effective: August 26, 1992. Applicable to payments received after December 31, 1973.

(a) In general.

(1) For taxable years ending after December 30, 1969, a taxpayer reporting gross income on the cash receipts and disbursements method of accounting may elect to include insurance proceeds received as a result of the destruction of, or damage to, crops in gross income for the taxable year following the taxable year of the destruction or damage, if the taxpayer establishes that, under the taxpayer's normal business practice, the income from those crops would have been included in gross income for any taxable year following the taxable year of the destruction or damage. However, if the taxpayer receives the insurance proceeds in the taxable year following the taxable year of the destruction or damage, the taxpayer shall include the proceeds in gross income for the taxable year of receipt without having to make an election under section 451(d) and this section. For the purposes of this section only, federal payments received as a result of destruction or damage to crops caused by drought, flood, or any other natural disaster, or the inability to plant crops because of such a natural disaster, shall be treated as insurance proceeds received as a result of destruction or damage to crops. The preceding sentence shall apply to payments that are received by the taxpayer after December 31, 1973.

(2)In the case of a taxpayer who receives insurance proceeds as a result of the destruction of, or damage to, two or more specific crops, if such proceeds may, under section 451(d) and this section, be included in gross income for the taxable year following the taxable year of such destruction or damage, and if such taxpayer makes an election under section 451(d) and this section with respect to any portion of such proceeds, then such election will be deemed to cover all of such proceeds which are attributable to crops representing a single trade or business under section 446(d). A separate election must be made with respect to insurance proceeds attributable to each crop which represents a separate trade or business under section 446(d).

Amount realized by tenant from lease buyout treated as capital gain

PLR 200045019

<a name="NEWSARC:54890.2">IRS has privately ruled that a landlord's payment to induce a tenant to move could be treated by the tenant as capital gain from the sale or exchange of a leasehold interest. That was true even though the tenant didn't actually have a lease in effect when the payment was made. He was occupying the premises under rent-control laws that apparently didn't require a lease.

Facts. A taxpayer we'll call Smith had entered into a commercial lease in a building. The lease was subsequently renewed for a period of years. Smith filed a rent overcharge complaint against the landlord on the ground that he had used the premises predominantly as a residence and, as a result, the premises were subject to his city's rent-control laws. He won the case and retained the right to continued possession of the premises for an indefinite period without a written lease. Smith's landlord agreed to pay him a fixed sum for agreeing to give up his apartment. The sum represented (1) a dollar amount for his interest in the premises, plus (2) enough money to cover estimated taxes. The second element was determined on the assumption that Smith's gain from the transaction would be treated as capital gain. In the event that the gain would be treated by IRS as ordinary income, the landlord promised to pay an additional amount, plus interest and penalties. The landlord also agreed to pay an undisclosed sum to the lawyer who had represented Smith to cover his legal fees.

Favorable ruling. IRS said it wasn't clear whether the leasehold was a capital asset under Code Sec. 1221 or a Code Sec. 1231 asset (because it may have been used for business purposes partially or for part of the lease period). In either case, however, IRS ruled that the gain recognized on the leasehold would be treated as capital rather than ordinary gain. Reasoning: Case law established that the right of possession under a lease or otherwise was a substantial property right which, if sold at a gain, would produce capital gain. On the particular facts of the ruling, IRS said that the holding period began with the vesting of Smith's statutory right of occupancy to the premises. Because Smith held this right for more than one year, his gain was treated as long-term capital gain.

IRS also ruled that the landlord's payments to cover Smith's legal expenses, and his tax bill, were part of the purchase price to the extent they were made for Smith's leasehold interest and not for Smith's abandonment of some other legal right or property not related to the lease transaction.

References: FTC 2d/FIN ¶ I-6341; United States Tax Reporter ¶ 12,214.31; United States Tax Reporter ¶ 1234A4; TaxDesk ¶ 25,08

Sounds like a sale of mineral rights that needs to be reported on Schedule D.

It’s an all or none deal, unless there are separate farming operations with separate books reported on separate tax forms.

There are some other requirements you need to be aware of. See pub 225 for details.

If mom has life estate and children have remainder interest, then you would determine the basis using the tables in pub 1457 and 1459. In another application, the tables are used to calculate the value of a charitable gift of the remainder interest in a home. This method is also used to determine the value of remainder interest in bankruptcy.

An appraiser will be needed to determine the FMV on the date deed was modified to create the remainder interest to children. Then you will need to find the section 7620 interest rate to determine which pub 1457 table to apply.

You will also need the appraiser to estimate the “remaining life” and “salvage value” of the house and structures for the reduction per pub 1459.

Once you have determined the value of the future interest that was transferred, you compare that amount to the compensation received, $20,000 per 1/3 share. If the amount received was less than full and adequate consideration; the difference would be a gift, since the parties are related.

I believe Julie is on the right track. It’s like he created a billboard for an ad campaign and is responsible for removing the billboard. Go ahead and take the expenses. If he is able to sale the exhibit later, that’s a separate transaction.

Yes, that is the form to use.

I tried the info as presented and the 5,000 got reported in 2010 but 10,000 was split 50/50 on 8606, not 7,500 for 2011 and 2,500 for 2012. Don't know what I am doing wrong or if the form isn't working right.

Thanks for any input

Keep in mind there are two separate transactions. First, the $15,000 conversion is reported on line 21 form 8606. Of that amount, $7,500 will be deferred to 2011 and 2012. Secondly, the $5,000 withdraw goes on line 26, subject to the 10% penalty.

Then in 2012 there will be a line item to reduce the taxable amount by $5,000 (similar to line 22 “basis” on the current year form). The software will have no idea of the amount taxed in 2010 so that will be a manual entry.

Jack, I think you misunderstood the situation which deals with the tax laws specific to the year 2010.

It is true that withdraw of contributions from a Roth are never taxable, but in this case the funds came from a converted IRA that normally would be taxable in the year of conversion. It sounds like there are two transactions here. First, $15,000 was converted from a regular IRA to a Roth. Under the current tax law, the $15,000 is taxed equally in 2011 and 2012.

In the second transaction, the taxpayer withdrew $5,000 from the converted Roth. So now, instead of deferring the tax on that amount to 2011 and 2012, the $5,000 is taxed in 2010. The net result is $15,000 of a converted IRA taxed over a three year period. Jainen nailed the timing on the remaining $10,000. ($7,500 taxed in 2011 and $2,500 in 2012)

The 2009 CCH Master Depreciation Guide discusses this issue on pages 289 and 290. They refer to Reg. Section 1.168(i)-4©, which states about halfway through: “No depreciation deduction is allowable for MACRS property placed in service and disposed of in the same taxable year.”

It appears the statement in Pub 946 comes from the Reg. The CCH Master Depreciation author notes that in the past depreciation was allowed for real property placed in service and disposed in the same year.

PS: I don't know how those "faces" ended up in the reg posting below!

***************************

Reg. Section 1.168(i)-4©

Changes in use

© Conversion to personal use. The conversion of MACRS property from business or

income-producing use to personal use during a taxable year is treated as a disposition of

the property in that taxable year. The depreciation allowance for MACRS property for the

year of change in which the property is treated as being disposed of is determined by first

multiplying the adjusted depreciable basis of the property as of the first day of the year of

change by the applicable depreciation rate for that taxable year (for further guidance, for

example, see section 6 of Rev. Proc. 87-57 (1987-2 C. B. 687, 692) (see §

601.601(d)(2)(ii)(B ) of this chapter)). This amount is then multiplied by a fraction, the

numerator of which is the number of months (including fractions of months) the property

is deemed to be placed in service during the year of change (taking into account the

applicable convention) and the denominator of which is 12. No depreciation deduction is

allowable for MACRS property placed in service and disposed of in the same taxable

year. See §§ 1.168(k)-1T(f)(6)(ii) and 1.1400L(B )-1T(f)(6) for the additional first year

depreciation deduction rules applicable to property placed in service and converted to

personal use in the same taxable year. Upon the conversion to personal use, no gain, loss,

or depreciation recapture under section 1245 or section 1250 is recognized. However, the

provisions of section 1245 or section 1250 apply to any disposition of the converted

property by the taxpayer at a later date. For listed property (as defined in section

280F(d)(4)), see section 280F(B )(2) for the recapture of excess depreciation upon the

conversion to personal use.

Definitely not SPIFF, prior preparer is wrong.

I beleive you can find a reference in section 691.

In regards to the imputed interest, you can look up the AFR for the year and month of sale.

Goodwill is reported as 1231 / 1245. Covenant is ordinary. Inventory is ordinary business income less cost of goods sold recognized in year of sale.

Hope this helps.

Dan

¶ 2627. Goodwill and covenants not to compete.

Goodwill is a capital asset, unless it is treated as an amortizable section 197 intangible under the rules explained at ¶ 1975 et seq. To the extent that the Code Sec. 197 rules don't apply, proceeds from the sale of a business that are allocable ( ¶ 2626 ) to goodwill are taxed under the capital gain and loss rules, FTC ¶ I-8601 ; USTR ¶ 12,214.55 ; Tax Desk ¶ 229,501 and payments for a covenant not to compete that is severable from the sale of goodwill results in ordinary income. FTC ¶ I-8603 ; USTR ¶ 12,214.56 ; Tax Desk ¶ 229,502

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(Also see IRS PUB 537)