Questions and Answers from the Tax Help Desk
Tax season was very busy for the NSA Tax Help Desk and we are glad we were there to help so many members. Here is a selection of some common questions that came across the path of the Tax Help Desk this past tax season. Questions ranged from filing status and dependent questions to international and tax treaty based issues; from individual issues to corporate, estate, and trust situations.
Question
The taxpayers have been filing a Form 1041 and that entity has assets within it from either a death or a transfer by the owners or grantors. What happens when those assets and items within the estate or trust are ultimately distributed to the entities beneficiaries? Is there a gain or loss, and what is the basis in those assets to the beneficiaries?
Answer
The basis of assets distributed out of an estate or trust that has been filing a Form 1041 is the basis of that property in the hands of the estate or trust. This particular rule is covered under IRC Sec. 1014 and the specifics of IRS Regulation 1.1014-4(a)(2). There is no taxable event triggered by the distribution of assets out of the estate or trust entity to the beneficiaries of that estate or trust.
The beneficiaries basically step into the shoes of the estate or trust and there is a carryover basis, a carryover character of the asset and if applicable a carryover depreciable method and life, including any accumulated depreciation.
Question
What happens to the suspended passive losses of a rental property that an estate of trust maintains that is distributed to that entities beneficiaries? In other words, if an estate or trust—filing a Form 1041—that has been reporting a rental activity that has been running a loss in the past couple of years, now distributes that property to its beneficiaries. What happens to the suspended passive losses trapped within the estate or trust?
Answer
Unlike most items in an estate or trust that are distributed to the beneficiaries, and that maintain their character and form in tax treatment… the suspended passive carryover loss does not. This type of loss does not maintain its character upon the underlying property which produced its loss is distributed. The provisions of IRC Sec 469(j)(12) required that the suspended passive losses be added to the basis of the property being distributed. They do not retain their character as suspended passive losses.
This is a departure from other types of losses or deductions that in fact retain their character when distributed in the final year of an estate or trust. Items like a net operating loss (NOL), a capital loss carryover or the excess deductions upon termination all retain their character and pass-thru to the beneficiaries upon filing the final Form 1041 for an estate or trust.
Question
The issue of gambling winnings and gambling losses always comes up during tax season if not for the seemingly unfair tax treatment of the two items and their inability to net with each other on the tax return. The question of where to deduct gambling losses will often be asked, and the twist to the question is what if the taxpayer does not itemize deductions using the Schedule A?
Answer
This is a problem for most taxpayers whom gamble, win, receive a Form W-2G, and do not file a Schedule A with their tax returns but instead use the standard deduction. The general rule is that gambling winning are reported on Line 21 of the front page of the Form 1040, and that gambling losses are reported on Line 28, of the Schedule A, are not subject to the 2% of AGI limit.
Unless you are a professional gambler, and are eligible to use the Schedule C on the front page of the Form 1040 – there not an above-the-line deduction for gambling losses.
However, in this age of electronic tracking of the gambling card or players’ card – the nonprofessional gambler will use this card to track their gambling activity for casino perks and comps. This card will track a gambler’s coin-in and coin-out on a session or daily basis.
The IRS has finally drafted and released a fairly current temporary ruling under IRS Notice 2015-21. This IRS Notice and the Shollenberger case have left nonprofessional gamblers with a form of netting on a daily per session, or per visit basis gambling winnings with gambling losses. This system of determining a net gain or a net loss from gambling activity will allow for an above-the-line deduction for gambling losses that would typically not be allowed.
Question
There were a lot of limited liability company (LLC) questions and the type of entity that a limited liability company is and what type tax return it files. The Tax Help Desk also encountered various issues dealing with the change in an LLC status by making an election or adding or deleting a member in the LLC.
Answer
The overall taxable status, or entity classification, of a limited liability company (LLC) is governed under the rules of IRC Sec. 7701 and the IRS Regulation 301.7701-1 and 301.7701-3. There is what is referred to as a default status to any LLC based on the number of members that it has at its formation. So an eligible entity formed under the laws of a particular State as an LLC with a single member is by default a disregarded entity and is not considered a separate entity from its owner and will file as a Schedule C, sole proprietor. The eligible entity formed under the laws of a particular state as an LLC with more than one (1) member will, by default, be considered a partnership and will file a Form 1065.
The LLC, as an eligible entity, can change its default treatment to some form of corporate status by filing the Form 8832. The filing of this form allows the taxpayer to change the LLC from its default status to that of a regular C-Corporation filing a Form 1120. Should the taxpayer wish to be viewed as an S-Corporation, it would merely file a Form 2553 instead of the Form 8832.
Then there are events when LLC’s move from one (1) member to more than one (1) member and it will change from that default entity into a partnership entity. Or where the LLC moves from an entity with two (2) or more member to just one (1) member and they move from a partnership filing a Form 1065 to a disregarded entity that will actually have to close out their Form 1065 with a final return because they become a Schedule C, single-member LLC.
The tax practitioner can look to some rules and guidance in IRS Revenue Rulings 99-5 and Revenue Ruling 99-6 regarding the issues that occur when LLC move from single member to multiple member or from a multiple member entity to one with a single member.
Question
The Tax Help Desk sees a lot of questions regarding required minimum distributions (RMD) and those distributions being missed. The taxpayer comes in and they are 73 years old and they have never taken a distribution from their IRA after turning age 70 ½? Or your taxpayer walks in and informs you that they inherited an IRA from a relative whom passed a couple of years ago? Now what is to be done?
Answer
The first reaction of the taxpayer is that they somehow have to catch-up, that they have to make-up all of those missed distributions. That, however, is not the case… there is NO catch-up, there is no requirement that a taxpayer take a total of all of the missed RMD amounts in the current year. The taxpayer must merely “start” with the minimum required distribution, they need to get those distributions started so that they comply in the future on an annual basis with IRC Sec 401(a)(9)(A).
The larger problem here is the 50% penalty under IRC Sec 4974 for the failure to take those minimum required distributions in the past. This penalty is accessed on an annual basis, it is figured on the Form 5329 Part IX and is 50% of the amount that should have been distributed each year… a rather steep penalty for taxpayers that often cannot afford to lose that kind of money in retirement.
The IRS does provide for a procedure for the waiver of this penalty. This waiver procedure can be found in IRC Sec 4974(d) and Regulation 54.4974-2. It is based on the theory of reasonable cause and that the taxpayer is taking, or has taken, protective steps to remedy the situation. The waiver procedures are also performed through the filing of the Form 5329 for the affected tax years.
The Tax Help Desk would like to thank all of the members whom made use of this service during the tax season and we hope that you found it beneficial. We offer this service “year round” and encourage that you take advantage of this valuable member benefit and use the Tax Help Desk anytime!
Active, Associate and Life members of the NSA get five questions answered per year free. Visit the Tax Help Desk for more information and to submit questions online.
