60 DAY IRA ROLLOVERS: TAX COURT SAYS DON’T FOLLOW IRS GUIDANCE

by | Mar 18, 2014 | News

A recent U.S. Tax Court case, Bobrow v. Commisioner, T.C. Memo 2014-21, held that a taxpayer may only conduct one 60-day rollover of retirement plan funds per 1-year period. The Court’s opinion was a drastic change from what most taxpayers and professionals understood and from what the IRS has explained in its own publications.

The relevant facts of Bobrow are as follows. Mr. Bobrow conducted two 60-day rollovers in a 1-year period with two separate IRA accounts. He received both sums of money personally and paid them back into his two respective IRAs each within 60 days. Mr. Bobrow, presumably, believed that since he had two different IRAs that he could do two separate 60-day rollovers with those accounts without having either account subject to withdrawal. While Mr. Bobrow relied on a commonly accepted practice that was supported clearly by IRS guidance, the Tax Court disagreed based on the language of IRC 408 (d)(3)(B).

A 60-day rollover is often used by retirement account owners who temporarily roll-over money to themselves personally from their existing retirement account and re-deposit the funds into a new custodian’s retirement account within 60 days.  A 60-day rollover, however, is not to be confused with a trustee to trustee transfer or even a direct rollover, whereby retirement account funds are sent from the prior custodian or trustee of the retirement account funds to the new custodian or trustee. These types of transactions can be done as many times as an account owner desires and do not result in a retirement account owner’s personal receipt of retirement account funds or withdrawal under the tax rules. A 60-day rollover, on the other hand, is sent to the retirement account owner in their own name and can be deposited and used by the retirement account owner during the 60-day period so long as the funds are returned to the retirement account or to a new account within 60-days. A 60-day rollover is sometimes used by retirement account owners who, for example, withdraw funds from their IRA for short-term personal use or investment and then return the withdrawn funds to their IRA within 60-days.

Under IRC 408 (d)(3)(A), an IRA owner’s withdrawal from an IRA is not taxable when returned or deposited into a new IRA within 60 days. However, the question posed in the Bobrow case was how many 60-day rollovers can an individual do in a 1-year period. The 60-day rollover exception is limited in the Code when an individual has already received one 60-day roll-over from an IRA in the past 12 months. The Code specifically states that the 60-day rollover exception cannot be used if the individual has already completed and relied on the exception for a 60-day rollover in the prior 1-year period. IRC 408(d)(3)(B). It has been unclear, however, whether the one 60-day rollover per year applied on a per IRA basis or whether it applied to the individual for all of their accounts.

The IRS had clarified that questions and has previously explained that an individual can conduct one 60-day rollover per 1-year period per IRA and thus interpreted IRC 408(d)(3)(b) to apply on a per IRA basis. This one 60-day rollover per IRA rule is explained by way of example in the current version of IRS Publication 590, page 25, as follows.

You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2

Based on this explanation, it is clear that the guidance from the IRS is that an individual can make one 60-day rollover per account per 1-year period. Yet, despite this publication, the IRS sought to make Mr. Bodrow’s second 60-day rollover from a separate IRA taxable as it was his second 60-day rollover in a one-year period. The IRS did not give any consideration to the fact that the second 60-day rollover was from a separate IRA (as it clearly explained in IRS Publication 590 to be acceptable).

The U.S. Tax Court agreed with the IRS and held that the limitations of IRC 408 (d)(3)(B) means that an individual can only conduct one 60-day rollover per 1-year period. After my own analysis of IRC 408 (d)(3)(B), I have to say that I agree with the Court’s opinion as the statutory language does not make a distinction between accounts but instead refers to 60-day rollovers taken per individual. Consequently, the intent of the statute is that a taxpayer can only conduct one 60-day rollover per 1-year period for all of their IRAs. Unfortunately, the error of the IRS in providing incorrect guidance does not go in favor of the taxpayer.

Based on the Court’s opinion, retirement account owners are well advised to only conduct one 60-day rollover per 1-year period. Keep in mind that you can conduct as many trustee to trustee or direct rollovers per year as you want as those transfers or rollovers result in money being sent directly to a new retirement account custodian or trustee and are not governed under the 60-day rollover rules.

As of March 18, 2014, the Bobrow case is still somewhat in limbo as there is currently a motion to reconsider filed by the taxpayer pending with the Court. Once the Court decides the motion to reconsider, the Judge will issue a final decision and after the decision is entered the taxpayer will have 90 days to appeal the Court’s ruling to the U.S. Court of Appeals for the Third Circuit. Given the significance of the Court’s ruling, I presume that the case will likely be appealed and heard by the U.S. Court of Appeals for the Third Circuit.

By: Mat Sorensen, attorney and author of The Self Directed IRA Handbook.

ARE YOU CONSIDERING MOVING YOURSELF OR YOUR MONEY OUTSIDE THE U.S.?

by | Mar 4, 2014 | News

Are you a U.S. citizen considering moving yourself or your money outside the U.S.? Before you or money leave the USA, first consider the tax and legal consequences as they are often misunderstood.

U.S. Citizens have numerous tax and reporting obligations that arise from their foreign assets, investments, and accounts. In essence, if you have foreign assets, investments, or bank accounts, then you have two obligations to the United States Government.

First, you must disclose any foreign bank account whose value is over $10,000 (all foreign accounts are combined to reach the $10,000 threshold) and you must report any foreign asset (e.g. foreign stock, company ownership, etc.) whose value is $50,000 or greater.  The form required to be filed annually to disclose foreign bank accounts in excess of $10,000 is known as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The form filed annually to disclose foreign assets with a value in excess of $50,000, is IRS Form 8938, Statement of Specified Financial Assets. In sum, the first obligation U.S. citizens have to their home country is the disclosure of foreign bank accounts and foreign assets.

Second, as a U.S. citizen you are required to pay U.S. federal income tax on the foreign income you receive as the U.S. taxes its citizens on income no matter whether it was earned in the U.S. or abroad. In other words, even if you make money outside the U.S., as a U.S. citizen, you are still required to pay federal tax on that income. If you paid foreign income taxes to the country where the income was derived and if that country has a tax treaty with the U.S., then you’ll typically receive a credit in the U.S. for the foreign taxes paid, which thereby reduces the amount of federal taxes owed in the U.S. Click here to see the list of countries with a foreign tax treaty with the U.S.

Some U.S. citizens presume that if they leave the U.S. that they are no longer subject to federal income tax in the U.S. but this is not the case. Even if you relocate to a foreign country and no longer earn income from the U.S. you are still subject to U.S. tax and on your foreign income (and potential state income tax depending on your state of residence). The only way to entirely escape the tax jurisdiction of the United States is to renounce U.S. citizenship but this is a costly and expensive process with numerous tax repercussions. See the Expatriation Tax rules from the IRS for more information here.

Let’s run through a common example that demonstrates how the disclosure and income tax reporting requirements work. A U.S. citizen has a bank account in Switzerland with a balance of $100,000. That account generates income of $5,000 for the year. For example purposes, let’s say that the $5,000 in income resulted in taxes owed to Switzerland of $500 and that the U.S. citizen reported and paid the tax to Switzerland. In addition to compliance with Switzerland law, the U.S. citizen would need to file FinCEN Form 114 (FBAR) to disclose the foreign bank account. The FBAR form filing is due by June 30th for the prior year’s accounts. The U.S. Citizen would also need to file IRS Form 8938, since the account was over $50,000. Form 8938 is due with the filing of the U.S. citizen’s federal tax return. In addition to the two disclosure forms that are filed in the U.S., the $5,000 of income from the Switzerland account must be reported as taxable income on the income tax return (form 1040) of the U.S. citizen. The $500 paid in tax to Switzerland will be credited to the taxpayer in computing the tax owed to the U.S. because the U.S. and Switzerland have a tax treaty. In sum, a $100,000 foreign bank account resulted in two disclosure form filings to the U.S. and inclusion of the income on the U.S. citizen’s federal tax return.

These are just the basics and every country has their own nuances. In addition there are many special rules and there are numerous exceptions to the filing discussed herein and as a result a U.S. citizen leaving the U.S. or sending money outside the U.S. should seek out experienced professionals to assist them in their U.S. tax reporting obligations.

OBAMA’S MYRA RETIREMENT ACCOUNTS – UN-REALISTIC CAPS AND ZERO INVESTMENT OPTIONS

by | Feb 4, 2014 | News

In President Obama’s recent State of the Union Speech he proposed a new method to save for retirement called a MYRA. The MYRA, will work like a Roth IRA as contributions are from after tax dollars and withdrawals will be tax free. Or, will they? Like the President’s last proposal (you can keep your health insurance plan if you like it, you can keep your doctor), the devil is in the details. The myRA will be available to workers of businesses whose employers does not offer a 401(k) or other employer based retirement plan. Under the myRA, and upon voluntary cooperation from the employer, an employee can have contributions to their own myRA made directly from their payroll contributions. The minimum amount to start an account is $25 and the minimum payroll contribution amount can be as little as $5. While the details have not been discussed, presumably the maximum amount that may be contributed per year is the same as Roth IRAs ($5,500, under 50, $6,500, 50 or older). The myRA will be a government account managed by a private third party company. The accounts entire balance will be invested automatically, and without choice by the myRA account owner, into U.S. Treasury Securities. These securities earn about 2.5% a year. The government promises that no fees will be associated with these accounts. Additionally, there is an account maximum such that once an account reaches $15,000, it must be rolled over to a private Roth IRA account. In other words, the myRA is only good for $15,000. A myRA is by no means a retirement account you will retire on but rather a starter account that gets you into another retirement account (e.g., Roth IRA). What is very unclear in the current pronouncements is how myRA account owner’s can access these funds before retirement (again, presumably 59 ½). While the President and Treasury Secretary Jack Lew have stated that a myRA can be rolled over to a Roth IRA, they have made contradictory comments about worker’s access to the funds in a myRA. The President stated that funds may be accessible by a worker before retirement in an emergency while Secretary Lew stated that contributions invested into a myRA can be withdrawn at any time. As many Roth IRA owners know, withdrawls of Roth IRA contributions (not earnings) can occur at any time without penalty. So, how will this rule apply to a myRA. What is President Obama talking about when he says withdrawals can occur if there is an emergency? Well, needless to say, additional rules will be provided by the Tresuary Department as the President has tasked them with creating the rules for myRA accounts. Bottom line, these accounts offer no investment options outside of one government security and can only be used up to $15,000. While it will be a tool used for some, most other worker’s are waiting for a real solution that increases contribution amounts in existing plans being offered (401(k)s, IRAs, Roth IRAs, SEPs, etc.) while offering unfettered investment options. The myRA fails on both fronts.

Why You Need a Living Will? Ripped From the Headlines: THE MUNOZ CASE

by | Jan 28, 2014 | News

The recent case of Marlise Munoz reminds us all of one important decision we should not leave to others: Whether we want to remain on life support or not. A living will is a legal document that can be used to make  decisions as to whether we want to be on life sustaining support or whether we want to “pull the plug” if we are brain dead and in a vegetative state.

In November, Marlise Munoz suffered a pulmonary embolism and was taken to a hospital in her town of Fort Worth. She was pronounced brain dead two days later. Marlise was 14 weeks pregnant and under Texas law, her body was required to be left on life support even though the fetus was not able to survive.

Erick Munoz, Marlise’s husband, attempted to have her life support and ventilation removed after being told she was brain dead and after being with his wife’s body in the hospital. He stated she had previously expressed to him that she would not want to be kept on life support if she was in a vegetative state. However, Mrs. Munoz did not complete a living will.

Mr. Munoz stated to the Court that it was difficult to “endure the pain of watching my wife’s dead body be treated as if she were still alive.”

He further stated that, “As a married man, I became very familiar with the way Marlise’s body felt, the way her hair smelled and the way her eyes appeared when we looked at each other, among other things. Over these past two months, nothing about my wife indicates she is alive. When I bend down to kiss her forehead, her usual scent is gone. Finally, one of the most painful parts of watching my wife’s deceased body lie trapped in a hospital bed each day is the soulless look in her eyes. Her eyes, once full of the ‘glimmer of life,’ are empty and dead.”

Despite Mr. Munoz’s requests to the hospital that his wife be removed from life sustaining support, the hospital refused and Mr. Munoz was forced to file an action in Court to have the ventilation and feeding tube removed. Almost two months later, the Court in Texas finally approved the removal of life support and Mr. Munoz is finally able to lay his wife’s body to rest.

Dealing with the death of a spouse or other close family member is one of the most difficult situations a person will face. However, that experience is compounded and made even more difficult when family members are put into situations where they must make life ending decisions for their loved ones. A well drafted estate plan includes a living will (aka, health care directive) whereby a person makes a legal decision for themselves about whether they want to be on  life sustaining support or whether they want to be removed if they are brain dead and in a vegetative state. The living will can be used and relied on by family members and also allows a person to declare whether they want to be an organ donor and whether they want their body to be used for medical research or not. Hospitals are authorized and protected by law when they rely on a living will and it makes family decisions at a hospital so much easier.

Contingency Clauses in Real Estate Purchase Contracts

by | Jan 21, 2014 | Investing, News

Contingency clauses are some of the most important components of a real estate purchase contract, and can provide significant protections to buyers of real estate. A contingency clause typically states that a buyer’s offer to buy property is contingent upon certain things. For example, the contingency clause may state, “The buyer’s obligation to purchase the real property is contingent upon the property appraising for a price at or above the contract purchase price.” Under this contingency, the buyer is relieved from the obligation to buy the property if the buyer obtains an appraisal that falls below the purchase price. Because contingency cPhoto of a signpost with different directions with the text "Contingency Clauses in Real Estate Purchase Contracts."lauses provide the buyer a way to back-out of a contract they can be excellent tools for real estate investors who make numerous offers on properties.

Contingency Clause Examples

Here are some contingency clauses to consider in your real estate purchase contract.

1. Financing Contingency. A financing contingency clause states something like, “Buyer’s obligation to purchase the property is contingent upon Buyer obtaining financing to purchase the property on terms acceptable to Buyer in Buyer’s sole opinion.” Some financing contingency clauses are not well drafted and will provide clauses that say simply, “Buyer’s obligation to purchase the property is contingent upon the Buyer obtaining financing.” A clause such as this can cause problems as the Buyer may obtain financing under a high rate and thus may decide not purchase the  property. However, because the contingency only specified whether financing is obtained or not (and not whether the terms are acceptable to buyer), the clause can be unhelpful to a buyer deciding not to purchase the property. Some financing clauses are more specific and, for example, will say that the financing to be obtained must be at a rate of at most 7% on a 30 year term and that if the buyer does not obtain financing at a rate of 7% or lower then the buyer may exercise the contingency and back out of the contract.

2. Inspection Contingency. An inspection contingency clause states something like, “Buyer’s obligation to purchase is contingent upon Buyer’s inspection and approval of the condition of the property.” Another variation states that the Buyer may hire a home inspector to inspect the property and that the Seller must fix any issues found by the inspector and if the Seller does not fix the items specified by the inspector then the Buyer may cancel the contract. Inspection clauses are very important as they ensure that the Buyer is obtaining a valuable asset and not a money pit full of defects and repair issues.

Other important contingency clauses are clear and marketable title clauses, approval of seller disclosure documents, and rental history due diligence information (e.g., rent rolls, lease copies, financials, etc.).

Contingency Clause Issues

When using contingency clauses buyers should pay attention to a few key terms. I’ve personally seen many disputes arise as a result of one of the following issues.

1. What Happens to the Earnest Money. One important consideration that is often vague in real estate purchase contracts is what happens to the buyer’s earnest money when the buyer exercises a contingency. Does the buyer receive a full return of the earnest money? Does the seller keep the earnest money? If the contract is silent and if you as the buyer exercise a contingency, don’t count on the seller agreeing to a release of the earnest money as they are often upset that you are not going to purchase the property. Make sure the contract clearly states something like the following, “If Buyer exercises any contingency, Buyer shall receive a full return of any earnest money deposit or payment to Seller.”

2. Contingency Deadlines. Another important contingency clause issue is the date of the contingency clause deadline.  Most contingency clauses have expiration dates that occur well before closing. Those dates should typically be somewhere from 2 weeks to 2 months from the date of the contract, depending on the purchase and seller disclosure items and the type of property being purchased. For example, single family homes will typically have a shorter window as financing and inspection can occur more quickly than would occur under a contract to purchase an apartment building. Whatever the deadline is, make sure that the deadline is set far enough out so that you can complete your contingency tasks. You need to make sure you have enough time to obtain adequate financing commitments, to properly inspect the property, and that you have enough time to review the seller’s disclosure documents. Setting a two week deadline is sometimes done but two weeks is usually not enough time to complete financing commitments, inspection, and due diligence activities that are necessary to determine whether you are going to commit to purchasing the property. If contingency deadlines are approaching and you need more time, then ask the seller for an extension before the deadline arrives. If the Seller refuses an extension, then exercise the contingency you need more time to satisfy.

3. Exercise You Contingency in Writing. If you do exercise a contingency and decide to back-out of the purchase of the property, make sure you do it in writing. Don’t rely on telephone calls or even e-mails (unless the contract permits e-mails as notice). Additionally, make sure that the reason for the contingency and that the date of the contingency are put in writing and are sent to the seller in a method where the date can be tracked in accordance to the notice provisions of the contract. For example, if the contract requires a contingency to be noticed by fax or hand delivery, don’t rely on an e-mail to the seller or the seller’s agent as such communication will not invoke the contingency.

Once the deadline to exercise a contingency has passed, the buyer is obligated to purchase the real property and may be sued for specific performance (meaning they can be forced to buy) or at the least the buyer will lose their entire earnest money deposit. Contingency clauses are the best defense mechanism to a bad deal and should always be used by real estate buyers. Keep in mind that until you close on the property, the only investment you have is a contract and if you have a bad contract, then you have a bad deal.

SELF DIRECTED IRA INVESTMENTS & CROWDFUNDING: WHAT EVERY INVESTOR SHOULD KNOW

by | Dec 17, 2013 | News

Crowdfunding will soon become one of the most utilized methods of raising capital for small businesses, investment ventures, and start-ups. The concept of Crowdfunding is to loosen the restrictive securities laws so that new or existing companies can raise small sums of money from large groups of people. If you’re unfamiliar with Crowdfunding, check out my prior blog article on the subject here. http://72.52.171.134/~newsdirahandbook/sec-finally-releases-new-crowdfunding-regulations/

Self directed IRA investors will likely be a significant investor group in Crowdfunding offerings as much of the nation’s wealth (and available investment capital) is held in IRAs. Before deciding to invest your IRA into a Crowdfunding offering, self directed IRA investors should consider the following issues and factors.

  1. Will Your IRA Have to Pay UBIT Tax? Many Crowdfunding offerings will generate UBIT tax for the IRA owners of the company. UBIT tax applies to income received by an IRA that is not passive. IRC 511, IRS Publication 598. For example, if my IRA invests into a new tech start-up LLC, then the profits received by the IRA will likely be subject to UBIT tax since the tech company LLC is not a passive business. Also, if my IRA invests into a Crowfuding company that flips real estate the profits my IRA receives will also likely be subject to UBIT tax.Passive income received by an IRA, on the other and, is exempt from UBIT tax. IRC 512. If the Crowdfunding Company is a c-corporation, then there is no UBIT tax as c-corporation dividends to an IRA are exempt from UBIT tax.  Also, rental real estate income, royalty income, and interest income are exempt from UBIT tax.a
  2. An IRA Cannot Buy S-Corporation Shares. An IRA cannot buy stock in an s-corporation as an IRA does not qualify as an s-corporation shareholder. As a result, you cannot use your IRA to invest in an offering of s-corporation shares.
  3. Are You or Your Family Members Involved in the Crowdfunding Company? If you or your family members are owners or part of management in the company raising funds, then it may be a prohibited transaction for your IRA to invest into the Crowdfunding offering. The prohibited transaction rules apply to all IRA investments and essentially create restrictions on investments into companies where the IRA owner or family members of the IRA owner are involved. IRC 4975.
  4. Have Crowdfunding Rules Been Complied With? A Crowdfunding offering must include certain disclosure documents and financial records to prospective investors. Also, the transaction must be conducted through an SEC registered Funding Portal who serves as an escrow/transaction agent for the offering. And lastly, the Crowdfuding rules restrict how much someone may invest from all sources of their funds (personal and IRA). The amount that may be invested annually ranges from $2,000 to $100,000 per person and depends on the IRA owner’s annual income and/or Net Worth. This is an annual collective number for all Crowdfunding offerings and the IRA owner’s personal investments and their IRA investments are combined to reach the maximum limits.
  5. When Do You Need To Take Distributions? Most Crowdfunding offerings will restrict the investors from selling their interest for a certain period of time. Consequently, IRA investors in a Crowdfunding offerings need to plan for the long haul and should not invest into a Crowdfunding offering if they are planning or are required to take distributions from the sums being invested.
  6. Adequate Due Diligence. And last, but certainly not least, have you conducted adequate due diligence on the Crowdfunding offering? Do you understand how the company makes money (or plans to)? What are their operating expenses? What is the experience of the persons running the company? Do you understand the industry the company is in? Do the documents you received match up with what you have been told that peaked your interest in the offering?  I have previously prepared a due diligence top ten list that you can refer to here if you don’t know where to start. http://72.52.171.134/~newsdirahandbook/performing-due-diligence-before-you-invest-the-due-diligence-top-10-list/

Crowdfunding will become a significant investment option for self directed IRA owners. As a result, self directed IRA owners need to properly analyze the investment options for their IRA prior to executing investments.