Page 145 - TaxAdviser_2022

INDIVIDUALS

family members.33 The court found
support for its decision in Summa
Holdings34 and Benenson.35 The court An IRA trustee is required to keep adequate
indicated that this outcome was “the records and, if assets need safekeeping, they
inescapable logical consequence of what must be deposited in an ‘adequate vault.’
Congress has plainly authorized.”36
Spousal rollover of Roth IRA:
If a spousal rollover is desired, the Sec. 1041: Transfers of included was to be grossed up by the
spouse should be named as a benefi- property between spouses or legal fee that her malpractice attorney
ciary, but that does not always happen. incident to divorce was paid.
Relief was given in IRS Letter Ruling The Tax Court in Holliday38 (also dis-
202136004 where a trust was named cussed above under Sec. 61), held that Sec. 1235: Sale or exchange
as beneficiary of the decedent’s Roth the taxpayer’s $175,000 malpractice of patents
IRA. The surviving spouse was the settlement from her divorce attorney In Filler,39 the Tax Court determined
trustee of the beneficiary trust and was gross income. In 2014, the taxpayer $100,000 of income reported as a long-
sole beneficiary. She requested a ruling and her divorce attorney settled for term capital gain was ordinary income.
that she be allowed to roll over the $175,000 her claims that he committed The taxpayer received $100,000 from a
Roth IRA into one in her own name. malpractice by, among other things, corporation he controlled in exchange
A Roth IRA normally has no RMDs telling her he would file an appeal for substantially all the rights in a pat-
except at the death of the owner. The but failing to do so. The taxpayer’s ent he held. The taxpayer took numer-
spouse also requested that no RMDs malpractice attorney, who received the ous routes in arguing that this income
be required from the decedent’s Roth $175,000 settlement payment, deducted should be treated as a long-term capital
in connection with the rollover and his $73,500 fee, remitted to the taxpay- gain. None were successful.
that no further RMDs be required er $101,500, and reported this amount The court found that the taxpayer
during her lifetime. A favorable letter on a Form 1099-MISC. The taxpayer transferred the patent to a related party.
ruling was issued. reported the $101,500 as income on Therefore, gain on the sale of the pat-
her 2014 Form 1040, along with a ent is not eligible for capital gain treat-
Sec. 469: Substantiation corresponding subtraction on line 21, ment under Sec. 1235(d). As the gain
of material participation described as “misclassification of law- is not long-term capital gain under this
requirements suit recovery of marital assets.” The IRS section, whether it is such is addressed
In Ryder,37 the court upheld the IRS’s issued a notice of deficiency for tax on in Secs. 1222(3) and 1231(b).
findings that the taxpayers had losses $101,500 but later amended the claim After reviewing how the taxpayer
in the years 2002–2011 that were not for tax on the entire $175,000. acquired the patent, what rights in it he
deductible against other income of the The taxpayer argued that the possessed, and how long he held it, the
taxpayer related to their ranching busi- settlement proceeds were a nontaxable court determined the income from his
nesses. The taxpayers had a large com- return of capital because they compen- exchanging the rights to it to a corpo-
plex business structure incorporating sated her for the portion of her marital ration he controlled was not entitled to
multiple S corporations, employee stock estate that she “was rightfully and Sec. 1235 treatment, nor was it eligible
ownership plans, and LLCs, which gen- legally entitled to, but did not receive, for capital gain treatment under Sec.
erated operating losses. Their business due to the legal malpractice of ” her di- 1222(3) or Sec. 1231(b)(1).
also marketed various tax strategies, vorce attorney. The IRS argued and the
which the court detailed in its 190-page Tax Court agreed that the settlement Sec. 1401: Self-employment
opinion. The losses from the ranching proceeds were clearly from a settle- tax
LLCs were disallowed because of their ment agreement in lieu of damages for Social Security wage cap and
failure to provide adequate substantia- legal malpractice and were, therefore, benefit amounts increase: The
tion of material participation. taxable. In addition, the income to be Social Security wage base for 2022 is

33. Mazzei, 998 F.3d 1041 (9th Cir. 2021). 36. Mazzei, 998 F.3d at 1061.
34. Summa Holdings Inc., 848 F.3d 779 (6th Cir. 2017), rev’g T.C. Memo. 37. Ryder, T.C. Memo. 2021-88.
2015-119. 38. Holliday, T.C. Memo. 2021-69.
35. Benenson, 887 F.3d 511 (1st Cir. 2018). 39. Filler, T.C. Memo. 2021-6.

36 March 2022 The Tax Adviser