Taxable or Not Taxable???

[Terry D EA]

Client's mother entered a contract with a forestry company for the sale of timber from her land. Before the proceeds were paid the client passed away. The proceeds were paid to her 9 children in equal amounts after she died. I'm of the opinion the amount each one of her children received is taxable.????  Date of the contract determines this correct???? The proceeds were not paid out as part of her estate. I confirmed this with the attorney who completed the sale. I say not an inheritance but has the character of IRD???  Nobody has any idea what the basis of the client would have been. But at the very least, I think each child gets a step-up in basis to FMV. I am contacting the forestry company to see if they can shed any light on a possible basis. Total sale was for $131,700.00/9. I know there are some timber experts on this board so any help from anyone will be appreciated.

[Lee B]

It seems to me that more inquiries are needed. At first I was inclined to go where you seem to be headed.

What bothers me is that is that the checks were paid directly to the children which implies that perhaps you don't have all the info you need.

[Terry D EA]

Thank you!! I agree totally that I don't have all the information and the fact the checks were paid to her children bothers me as well. Keep in mind her children are 60 plus years old which is not all that important for this scenario. The task today, is to extend these returns which can present another problem as I don't know if anyone owes anything and I sure hate to ask them pay an amount they may not owe to begin with. I guess if they experience any penalties from filing a zero extension, it is on them cause they brought this to me Tuesday of this week.

Here is what even makes  this better, their attorney(s) told them it wasn't taxable. The attorney who handled the sale told me they wouldn't comment and left it up to them to talk to their accountant/tax advisor. The attorney did, however, verify this was not a sale to settle the estate which I can tell that as none of the checks went to the estate of....... Just a mess

[JohnH]

Absolutely they should be responsible for any interest and FTP penalties.  Don't accept any responsibility for their procrastination.  Personally, I'd give them an option.  I'd estimate the tax liability based on a worst-case scenario (the entire amount taxed at ordinary income rates).  Then explain to them that this is a high-side estimate - it may be lower or it may not, and they brought it in so late that there isn't sufficient time to research it. 

With the understanding that they will get a refund of any overpayment, and that they will owe a combined interest and FTP penalty of roughly 1% per month (plus estimated tax penalty if any), let them decide whether to send a payment with the extension.  Also, keep in mind that the NC FTP penalty is a flat 10% of the tax due, plus 1/2 of 1% per month.  I'd make it clear that if they choose to pay less than the high-side estimate, ALL penalties & interest are their responsibility.

Make it harsh and crystal clear - this is no time to soft-pedal the potential end result.  This should probably be in writing.  If they don't agree, hand their stuff back and wish them good luck. They still have the weekend to sit in an HRB office somewhere for a few hours and likely end up with the same result.

[BulldogTom]

Something does not add up here.  Who is handling the estate?  Final return of the decedent?  I think your answers will come from that person.

Tom
Newark, CA

[grandmabee]

who told the timber company to pay each person?  I think this money should have went thru an estate.  When was the sale?  before or after?

sounds like the attorney messed up.

[Terry D EA]

Well here is what I now know. The family chose to have the timber company withhold payment until they closed the estate. I agree totally this should have gone thru the estate. My client whose father is their dependent was one of the kids that received a check. We held things up to see if she could still claim him or not. My client has chosen to back out completely and not claim her father because one of the other kids who got money said they would handle this because the rest of them had to claim this as income but did not have to pay any tax on it. Really???? This whole thing does not pass the smell test. My client has made the right decision and I agreed to back out and take no fee for what research and time I had invested. None of this sounds like anyone involved is doing things the proper way. As Jack would say "run forest run".

[jklcpa]

Terry, see the section on income in respect of decedent in this publication 559, and specifically look at example 1. Could this be the case with your timber sale?

What was included in the estate inventory, was it the land with timber, land without the timber, the value of the payments due on the contract?  In other words, what did the heirs receive, the land and a firm contract to sell the timber, or did they inherit the right to collect the payments? Maybe I'm thinking of this too simply, but either way, I think they won't have much income if the transaction occured within a short period of time. Whatever it was that generated these funds, wouldn't they have basis that is fairly close to that item?

[Terry D EA]

Judy all of your statements are possible. I agree this could be IRD. But, they had the timber company hold off on the payment until the estate was closed. I don't know what the inventory was and the sale was just the timber but they or one of them now owns the land. Done properly through the estate? Again I don't know. The attorney told me the sale was not used to settle the estate. That's all I got from him. The contract to sell was originated by their mother, signed and agreed, and then she died supposedly before the contract was paid. This in of itself leads me to believe again IRD. All I wanted to do is determine basis, did they inherit at DOD? do they get mom's basis and possibly step up in basis? Again all unanswered. None of the other kids who received checks would say anything other than "we got a guy to do the taxes, and have to report it as income but pay no tax on it".  It is too late in the season to deal with this, my client wanted no part of it so I thought it best to run away.

Thanks for the pub reference Judy and I do appreciate your attempt at trying to be helpful. If I sound short, it is purely unintentional. Like others, I am completely worn out. I think I am finished, filed all my extensions and will finally make it to bed before midnight for a change.