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TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. I am getting ready to take my required minimum distribution (RMD) from my IRA- I am over 70½ years old. I heard something about being able to avoid the RMD by transferring money to my church. Is this true?

   Under the provisions of the Pension Protection Act of 2006, for tax years 2006 and 2007 an individual may direct a qualified charitable distribution of up to $100,000 be made from their IRA. The qualified charitable distribution counts toward the RMD. The distribution is neither taxable to the IRA owner nor is it deductible. A “qualified charitable distribution” is any distribution from an individual retirement account (other than a SEP or SIMPLE) which is made directly by the custodian to a qualified 50% charitable organization (churches, synagogues, temples, colleges, universities and social welfare organizations are examples of qualified 50% charities).

2. I plan to get married in the near future. My future wife had some tax problems in the past and is currently paying off her past due taxes, penalties and interest. I am concerned about filing jointly as IRS will seize my share of any refund we may be entitled to as well as her share to apply to her past due tax obligations. Is there anything we can do?
   

   You have a couple of options. First, you may elect to file separately. This will insulate you from any tax claims pertaining to your wife. However, this may create a situation where you are paying more tax in total than would be due if you and your spouse filed jointly. Calculations should be made to determine the most favorable method. In most cases, the lowest tax results by filing jointly. This brings us to the second option; filing jointly and filing Form 8379, Injured Spouse Claim and Allocation. Under this form, each spouse’s tax is calculated as if filed separately. The injured spouse’s tax is divided by the total tax, and then the percentage determined is used to calculate the percentage of the total tax owed by the injured spouse. The injured spouse’s payments are applied against this calculated amount and if the payments are in excess, that excess is refundable to the injured spouse. The injured spouse allocation only applies if there is a refund due.

3. I am the only shareholder of an S corporation. The corporation sold all of its assets several years ago on an installment basis. The corporation did not liquidate. The remaining principal on the installment note is scheduled to be paid over the next five years, but I would like to liquidate the corporation now. Is there any reason to keep the corporation going?
   

   If the corporation is liquidated at this point, the installment note will “collapse” at the corporate level and the remaining gain will be recognized. If an S corporation liquidates within 12 months of entering into an installment sale, installment reporting is preserved at both the shareholder and corporate level. As more than 12 months have passed since the sale, a distribution of the note will cause the all the remaining deferred gain on the note to be recognized by the S corporation (and pass it through to you, the shareholder).

4. I acquired a rental property a little over 2 years ago via a Section 1031 tax-free exchange. The tenant has moved out. I want to move in and convert my present home into a rental property. I would like to then sell the rental property in 2 years and use the $250,000 exclusion. Is there anything I should be aware of before I make the change?

   There is currently a provision in place that if a rental property is converted to a personal residence, the ownership requirement to meet the demands of Section 121 (which provides for an exclusion of up to $250,000 of gain- $500,000 if married filing jointly) is increased from 2 years to 5 years. You need not occupy the residence for 5 years, but must occupy it for at least 2 years and own it for 5 years prior to its sale to be eligible for the maximum exclusion of gain. Therefore, you are advised not to make the sale before both the 2 year occupancy and 5 year ownership requirements are met. Also, depreciation taken after May 6, 1997 is subject to recapture (subject to tax at a maximum rate of 25%) and is not excluded under Section 121.

5. I have a C corporation. Many years ago, the corporation acquired the building from which it operates. I (and the corporation) will be moving in the near future and I want to avoid tax on the sale of the building by arranging a Section 1031 exchange through a facilitator for another building. May I acquire the replacement property personally?

   To qualify for tax-free treatment, the proceeds held by the facilitator must be reinvested for the benefit of the same entity that placed the property into the exchange. You may not receive the replacement property from the facilitator individually and have the replacement quali fy the transaction as a tax-free exchange . The corporation must be the recipient of the replacement property.

6. I need money for my S Corporation. My plan is to have the corporation sign a note with a relative. Is there a better way to do this?

   If you borrow the money directly and then loan the money to the S Corporation or contribute it as capital, you may use that loan or capital contribution as basis. If the corporation borrows the money directly, you may not use the loan as basis.