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New developments: FICA Wages, IRA Rollovers and More.

In U.S. v. Quality Stores, Inc. No. 12-1408, 2014 BL 80719, 3/25/14), the Supreme Court, in an 8-0 opinion, reversed a decision by the Sixth Circuit Court of Appeals. The high court held that supplemental unemployment benefits paid to terminated employees were wages subject to Federal Insurance Contributions Act taxes because these payments were remuneration for services and were not linked to the receipt of state unemployment benefits.

IRA Rollovers

IRC Sec. 408(d)(3)(A)(i) generally provides that any amount distributed from an IRA will not be included in the distributee's gross income to the extent the amount is paid into another IRA for the distributee's benefit no later than 60 days after the distributee receives the distribution. But, under Sec. 408(d)(3)(B), an individual is permitted to make only one rollover described in the preceding sentence in any one-year period. Both Proposed Regs. Sec. 1.408-4(b)(4) (ii) and IRS Publication 590, Individual Retirement Arrangements (IRAs), provide that this limitation is applied on an IRA-by-IRA basis.

However, a recent Tax Court opinion, Bobrow v. Commissioner (TC. Memo 201421), held that the limitation applies on an aggregate basis. Therefore, an individual could not make an IRA-to-IRA rollover if the individual had made such a rollover involving any of the individual's IRAs in the preceding one-year period.

IRS Announcement 2014-15 (I.R.B. 2014-16, 3/20/14) states the IRS anticipates that it will follow Sec. 408(d)(3)(B)'s interpretation in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation. These IRS actions will not affect an IRA owner's ability to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation of Sec. 408(d)(3)(B). See Rev. Rul. 78-406 (1978-2 C.B. 157).

The IRS understands that adoption of the Tax Court's interpretation of the statute will require IRA trustees to make changes in the processing of IRA rollovers and in IRA disclosure documents, which will take time to implement.

Accordingly, the IRS will not apply Bobrozv's interpretation of Sec. 408(d)(3)(B) to any rollover that involves an IRA distribution occurring before Jan. 1, 2015. Regardless of the ultimate resolution of Bobrow, the Treasury Department and the IRS expect to issue a proposed regulation under Sec. 408 that would provide that the IRA rollover limitation applies on an aggregate basis.

However, in no event would this regulation be effective before Jan. 1, 2015.

Passive Losses

Material Participation

In Frank Aragona Mot 142 T.C. No. 9, 3/27/14), the Tax Court held that a residuary trust that owned and developed rental and other real estate properties qualified for the Sec. 469(c)(7) passive loss exception for real estate professionals. Thus, this trust was not subject to the passive loss limitations and could fully deduct its expenses, including trustee fees.

The court found that services performed by individual trustees constituted personal services performed by the trust. Consequently, the trust materially participated in its real property business.

This case will help minimize the new net investment income tax under Sec. 1411.

Real Property Foreclosure

A foreclosure on real property treated as a passive activity, "freed up" suspended passive losses under Sec. 469(g)(1)(A). These losses were not reduced by the debt cancellation income excluded from gross income by the insolvency exception under Sec. 108(a)(1) (B). See Chief Counsel Advice 201413002, 2/11/14.

Consolidated Return Leniency

Regs. Sec. 1.1502-75(b) authorizes the Commissioner, in certain situations, to treat a subsidiary as if it had filed Form 1122, "Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return," even though it failed to do so, for instance, due to a mistake of law or fact or if it was inadvertently not filed.

Rev. Proc. 2014-24 (I.R.B. 2014-13, 3/10/14) states the Commissioner will treat one or more subsidiaries as if Form 1122 had been filed under the conditions described in Section 3 of this revenue procedure.

Generally, if an affiliated group satisfies Section 3's requirements, the Commissioner's automatic determination granted by Rev. Proc. 2014-24, Sec. 3.01, is the exclusive means for determining that a subsidiary joined in a consolidated return--without filing Form 1122. This automatic determination is available regardless of whether the parent's return is under examination.

If an affiliated group cannot satisfy Section 3's requirements, the Commissioner's determination under Regs. Sec. 1.1502-75(b) is available only pursuant to a determination letter issued by a "Director" [defined in Rev. Proc. 20141, Section 1.01 (3)]. A 3275 user fee applies.

by Stuart R. Josephs, CPA

Stuart R. Josephs, CPA, has a San Diego-based Tax Assistance Practice that specializes in assisting practitioners in resolving their clients' tax questions and problems. He is chair of the Federal Subcommittee of CalCPAs Committee on Taxation. You can reach him at (619) 469-6999 or
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Title Annotation:Fed Tax
Author:Josephs, Stuart R.
Publication:California CPA
Date:Jun 1, 2014
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