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Gift Taxes Paid Continue as Washington Taxable Estate Assets for Three Years

Posted on by Kristi Richards

Making gifts shortly prior to death does not eliminate the federal gift taxes paid from a Washington resident’s estate.  Washington’s Supreme Court recently released a decision requiring federal gift taxes paid within three years of death must be included in a Washington taxable estate if required to be included in a federal taxable estate.  Estate of Ackerley v. Department of Revenue, 92791-0.  Barry A. Ackerly died on March 21, 2011. Prior to his death, Mr. Ackerley made federally taxable gifts in 2008 and 2010.  He paid federal gift tax of over $5.5 million on those gifts.  Mr. Ackerely’s estate included the value of those gift taxes on his federal estate tax return as required by IRC § 2035(b), but failed to include those taxes on his Washington estate tax return.  Mr. Ackerly’s estate petitioned superior court for review when the Department of Revenue issued a deficiency notice. The Thurston County Superior Court determined the gift taxes were included in Washington taxable estates at death, and the Washington Supreme Court affirmed the decision, with a dissenting opinion.

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2017 Estate Tax Updates

Posted on by Kristi Richards

Currently, both Washington state and the federal government have an estate tax due at an individual’s death, depending on the value of the assets the decedent owned. Both Washington and the federal government specify an amount of assets and money exempt from estate tax at death. Washington taxes assets transferred at death with no tax on lifetime gifting, while the federal government has a combined estate and gift tax and taxes non-spouse gifts over an annual exclusion amount as well as the value of assets over the specified exclusion amount at your death.

Washington’s estate tax exclusion amount rose to $2,129,000 as of January 1, 2017. This means that for a person dying in 2017, no tax is due until the decedent’s assets total more than $2,129,000. This amount increased from $2,079,000 in 2016, based on scheduled annual increases accounting for inflation. The tax due on amounts over the exclusion amount ranges from 10-20% depending on the size of your estate. More information on calculating Washington’s estate tax can be found here: washington-estate-tax-table.

The federal government continues to have an estate and gift tax exclusion amount in 2017. The exclusion amount for 2017 is $5,490,000 (and can be doubled between spouses if the surviving spouse takes advantage of the portability of a deceased spouse’s unused exclusion amount). The exclusion amount available at death is reduced by prior taxable gifts made to anyone other than your spouse. The federal government taxes estates with asset values above the exclusion amount at rates between 18-40%. This tax is in addition to the Washington state tax estate paid at death. For more information on calculating federal tax, see here for the tax table and rates: federal-estate-tax-table.

Current federal law retains the estate tax exclusion with annual increases for inflation, but both the president-elect and the republican legislature have indicated a plan to eliminate the federal estate tax in its entirety. Additionally, the president-elect’s proposed plan could eliminate the step-up in asset basis at death for beneficiaries. Such a step could lead to either taxation of capital gain assets at death or a carry-over basis to the beneficiaries. The coming presidential term could bring interesting changes to the federal estate tax for all families. Regardless of potential changes in the law, estate planning remains an essential element in protecting your assets and planning for your family’s future.

IRS Collection Policy Update – Changes to Streamlined Installment Payment Plans

Posted on by George Munro

The IRS recently updated rules under 26 U.S.C. § 6159 regarding streamlined installment payment agreements to expand the number of eligible taxpayers and ease certain requirements. The current changes are a test program lasting through September of 2017.

The IRS has authority under the code to enter into payment agreements with taxpayers to facilitate payment and collection of outstanding tax balances. The code requires the IRS accept an installment agreement when a taxpayer has a tax liability of $10,000 or less, is current on filing, and meets the criteria of 26 U.S.C. § 6159(c). The standards to enter into an installment agreement for taxpayers with higher liabilities have been more stringent, including requirements to verify ability to pay, limiting installment payments to tax liabilities under $50,000, and the threat of federal tax liens.

The new, temporary rules ease some hurdles for taxpayers with  higher outstanding tax liabilities. The IRS no longer requires submission of a Collection Information Statement verifying ability to pay and will not require direct debit or payroll deduction for taxpayers with a tax liability between $25,001 and $50,000. However, if the taxpayers choose direct debit or payroll deduction payment, then IRS will no longer require a Notice of Federal Tax Lien. Any taxpayer declining the automatic payment methods will still find itself subject to a determination. These same rules apply to active businesses with tax liability up to $25,000, and to out-of-business sole-proprietorships with up to $50,000 of tax liability.

Taxpayers with tax debt of $50,001 to $100,000, previously excluded from the streamlined installment agreement program, can now qualify for the streamlined process. If accepted for the streamlined process, the taxpayers must make full payment in the lesser of 7 years (84 months), or the number of months necessary to satisfy the liability in full by the Collection Statute Expiration Date. Moreover, the IRS will waive a Collection Information Statement, but only if the taxpayer agrees to payment using direct debit or payroll deductions. The IRS will not waive a determination on Notice of Federal Tax Lien for tax liabilities in this range. The same criteria apply to out-of-business sole-proprietorships.

While temporary, the rule could become permanent if the IRS determines the expanded process improves customer service, reduces taxpayer burdens, and increases agency efficiency. Taxpayers with substantial tax liability should consider whether the expanded eligibility and eased requirements under these announced rules provide a means to pay off outstanding tax debt.

Overall, the IRS has recently updated their operative tax collection rules.  These new rules will substantially reduce red tape and delays for taxpayers owing between $10,000 and $100,000 who wish to enter into an installment agreement.

Estate Tax Update – Proposed Regulations to Limit Valuation Discounts

Posted on by George Munro


On August 2, 2016, the Department of the Treasury circulated proposed regulations under Section 2704 of the Internal Revenue Code which significantly reduce a taxpayer’s ability to claim lack or marketability and lack of control “discounts” when valuing property for purposes of the federal gift and estate tax.  These new rules, if and when they are finalized in the coming months, will very likely increase high-net-wealth individuals’ gift and estate tax burden.  Therefore, high-net-wealth individuals should consider making gifts before these new rules go into effect.

Under current law for tax year 2016, a taxpayer is allowed to gift up to 5.45 million dollars during his or her lifetime before incurring a gift tax liability.  Once the total sum of a taxpayer’s lifetime gifts exceeds 5.45 million, then the taxpayer must pay gift tax on all subsequent gifts.  Under current federal law, gifts are taxed at a maximum marginal tax rate of forty-percent.

Under the current gift and estate tax regime, the taxable value of all gifts are based on the fair market value of the gift at the time of the gift.  For instance, if a taxpayer gifts 100% of a LLC that holds a million dollar piece of real estate, then the taxpayer must report a taxable gift of one-million dollars on his or her gift tax return.  However, if a taxpayer were to gift a minority interest in the same LLC (less than 50%), then applicable law allows the taxpayer to claim valuation “discounts” for factors such as the minority ownership, lack of control, and lack of marketability.

For instance, if a taxpayer were to gift a forty-percent interest in the above-mentioned one-million dollar real estate LLC, under current law, it’s entirely possible that the forty-percent LLC interest would be valued at substantially less than $400,000.  Instead, that forty-percent LLC interest could potentially be valued in the realm of $240,000 to $280,000 for federal gift tax purposes.  This reduction in value is due to many factors including the fact that it’s difficult to sell a minority interest in an LLC and a forty-percent LLC interest would give the minority interest owner  little to no control over the LLC as a whole.

The ability to reduce gift and estate tax valuation through the transfer of fractional interests in property (rather than transferring the entire property) is a powerful tool that has been used by estate planners for many years.  Congress has long sought to curtail this practice, and the newly-issued proposed regulations purport to do just that.

The newly-proposed treasury regulations attack valuation discounts on numerous fronts.  One way that the new rules reduce a taxpayer’s ability to claim discounts is by deeming that most business interest gift recipients hold a 6-month put-right immediately following the gift.  If the minority interest member is deemed to hold a put-right for gift tax purposes, then the minority interest member has an available and captive market to cash out his or her newly-received business interest.  Therefore, these new rules significantly curtail the very rationale for valuation discounts for reasons such as lack of marketability.

The new rules are not in their final form, and there are many stakeholders who actively oppose the new rules.  Therefore, it’s impossible to know when the rules will be finalized and the form these new rules will take when they are finalized.  What is clear is that the treasury department is making a concerted effort to curtail this estate-planning practice.  These proposed regulations could go into effect as early as December 2016, but it’s possible the proceedings will slow as stakeholders voice their concerns and questions.  Overall, estate and gift tax valuation discounts are threatened by newly-proposed regulations; therefore, high-net-wealth individuals should consider accelerating any planned gifts before the new rules are finalized and become effective.

The PATH ACT – Permanently Extending the Qualified Small Business Stock (QSBS) 100% Gain on Sale Exclusion

Posted on by George Munro

Many small business owners face a large tax liability in the year of selling their business.  A typical business owner will work in the business for many years, dutifully paying all applicable taxes.  Then, when cashing out to retire, the federal government (and maybe the state where the business resides) wants one last, large, piece of the pie.  Depending on the type of business being sold and the structure of the purchase and sale agreement, it’s entirely possible for a business owner to pay over half of the sales price to the IRS and state tax authorities.

Key to taxation results is whether the sale is structured as a stock or asset transaction.  In addition, the legal and tax structure of the company being sold (partnership, s-corporation, or c-corporation) makes a tremendous difference for tax results.

There have been relatively few federal tax law changes over the past several years with regards to these types of domestic sale transactions.  However, recent legislation passed by Congress has significantly changed the tax calculus for sales for small businesses operating as “C” corporations, if the sale transaction can be structured as a stock sale instead of as an asset sale.

In December 2015, the Protecting Americans from Tax Hikes (“PATH”) Act was passed into law.  The PATH ACT made permanent the 100% exclusion of gain on sales of stock that qualify under the Section 1202 rules of the Internal Revenue Code.  Section 1202 allows a taxpayer to exclude up to 100% of the gain from the sale of Qualified Small Business Stock (“QSBS”).

In order for  stock to qualify stock as QSBS, several requirements must be met, including: (1) the stock must have been initially acquired from the company for valuable consideration by the shareholder, (2) the stock must be issued by a domestic C-corporation, (3) the C-corporation must have gross assets not exceeding fifty million at the time of the stock issuance and beforehand, (4) the corporation must operate an active trade or business, and (5) the shareholder must have held the QSBS for at least five years.

If the stock qualifies as QSBS, then a certain percentage of the gain from the sale is excludable under Section 1202.  The excluded percentage depends on the date the QSBS was issued to the taxpayer.  Any QSBS received between 1993 and February 18, 2009 is eligible for 50% gain exclusion.  Any QSBS acquired between February 18, 2009 and September 27, 2010 is eligible for 75% gain exclusion.  Any QSBS acquired after September 27, 2010 is eligible for 100% gain exclusion.  Prior to the enactment of the PATH Act, the 100% exclusion had to be extended by congress on a yearly basis.  Because QSBS must be held for five years to qualify, any planning involving QSBS was tenuous.  However, the PATH Act permanently extended the 100% exclusion on eligible gain for sales of QSBS.

While there are some limits to the QSBS exclusion (for instance, there is a ten million maximum  exclusion per issuer per shareholder and a maximum exclusion of ten times the shareholder’s basis in the stock), overall QSBS is a powerful tool to eliminate or reduce tax liability stemming from the sale of a C-Corporation.  We are only now starting to see the full benefits of the 100% QSBS exclusion.  Due to the five year holding period, September 27, 2015 is the earliest date any transaction could theoretically qualify for a 100% QSBS exclusion (rather than 50% or 75% exclusion).  As more taxpayers and advisors see the benefits of QSBS, the gain exclusions available upon sales of QSBS make it likely that more business entities will form as C-Corporations, in particular those businesses that have a set mid-term exit plan and large initial capital investments.  Overall, QSBS can significantly reduce the tax for some small business sales.  Therefore, whether forming, operating, or selling a small business, taxpayers should consider the potential tax benefits of QSBS.

The information provided herein is general in nature and not specific legal advice.  The information should not be relied upon for any purposes.  

Increase in Federal Estate Tax Exemption for 2016

Posted on by Alison Warden

As of January 1, the federal lifetime estate and gift tax exemption has increased for inflation to $5.45 million per person. This is just slightly up from $5.43 million in 2015. Married couples can get the benefit of two individual exemptions, so in 2016 the total exemption per couple will be $10.9 million. Persons who die in 2016 with estates valued at the exemption amount or less (taking into account their cumulative lifetime gifting), and persons who have made cumulative lifetime gifts valued at the exemption amount or less, will owe no federal estate or gift tax on the transfers. Those with estates and/or lifetime gifts in excess of such exemption amounts will owe a 40% tax on the value of the same to the extent of such excess, after taking into account appropriate credits and deductions (e.g., the marital or charitable deduction).

In related 2016 news, the federal “annual gift exclusion,” also indexed for inflation, will remain where it has been since 2013 – at $14,000 per recipient. What this means is that an individual can gift up to $14,000 to another person tax-free and without the need to report the gift on a gift tax return (IRS Form 709).  There is no limit on the number of $14,000 gifts a taxpayer can make, as long as each is to a different person. If a non-charitable gift in excess of $14,000 is made to a non-spouse in 2016, the donor must file a gift tax return, and such amounts will be subtracted from the donor’s $5.45 million federal lifetime estate and gift tax exemption. That said, transfers between spouses are usually wholly tax-free, no matter the amount transferred.

Washington has yet to officially release its state estate tax inflation adjustment for 2016. The 2015 amount was $2.054 million per person, and we may see it slightly increase again this year, so stay tuned. (Last year, the exemption amount was released in March.) Washington estates in excess of the exemption amount are subject to a 10-20% Washington state estate tax, with overall rate depending on the size of the estate over the exemption amount. Washington does not currently impose a gift tax, which makes lifetime gifting particularly important for Washington clients who have potentially taxable estates.

Washington State Estate Tax in 2015

Posted on by Alison Warden


The 2015 Washington state estate tax exemption for deaths occurring in 2015 is $2.054 million. This is up from $2.012 million in 2014.  Amounts passing to heirs above the $2.054 million mark will be taxed at a rate of 10-20% unless the such gifts are otherwise eligible for a deduction under Washington state law (such as a marital or charitable deduction).

If you’d like more information on how to calculate the tax, see here for the tax table and rates: WA State Estate Tax Table.

ObamaCare Premium Tax Credit Penalty Relief

Posted on by George Munro

Many taxpayers will not be entitled to a federal income tax refund this spring. Instead, they will have to write a check to the IRS due to freshly implemented rules under the Patient Protection and Affordable Care Act (i.e., ObamaCare). However, a recently published IRS notice gives relief from some tax penalties arising from the ObamaCare advanced premium tax credit payments.

One of ObamaCare’s primary features is the health insurance premium tax credit.  It was enacted to help make health insurance affordable for lower-income individuals who could not access health insurance through other means such as an employer or Medicare. While refundable tax credits are typically paid to a taxpayer in the following spring after a tax return is filed for the prior year, the premium tax credit can be “paid” to the taxpayer throughout the tax year via government payment of health insurance premiums, well before any tax is computed or return is filed. In addition, the amount of the premium tax credit varies significantly depending on the income-level of the taxpayer. The higher the income level of a given taxpayer, the smaller the premium tax credit he or she will receive.

Because the premium tax credit is paid ratably throughout the year and the amount of the credit directly corresponds to the taxpayer’s income, the taxpayer must estimate his or her income for the entire year when initially applying for the credit at the beginning of the year.  This is done so that the government can advance the proper amount of credit to the taxpayer throughout the year (i.e., at the beginning of 2014, a taxpayer must estimate her income for all of 2014). Because advanced credit payments are based off an income estimate, the IRS requires an income reconciliation at he end of the year when filing the tax return. Under the reconciliation rules, any taxpayer who underestimates 2014 income when applying for the premium tax credit in the prior year will owe the government the difference after completing the reconciliation form.

In addition to paying back the difference between the amount of premium tax credit a taxpayer received and the amount of premium tax credit that the taxpayer should have received, the taxpayer might also be liable for the failure to pay penalty and the estimated tax penalty (as well as other penalties). However, in Notice 2015-6 the IRS agreed to abate failure to pay and estimated tax penalties for taxpayers who are unable to repay excess advanced premium tax credit payments from 2014, but only if: (i) the taxpayer is current with all filing and payment obligations other than the amount owing from the 2014 premium tax credit and (ii) the taxpayer timely files the 2014 return which properly reports the excess advanced premium credit.

The IRS will abate a late payment penalty for failure to timely pay tax stemming from the premium tax credit if a taxpayer responds to the IRS notice which imposes said penalty by stating, “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.” In addition, the IRS will abate an estimated tax penalty stemming from premium tax credit advances if the taxpayer includes Form 2210 page one with the rest of the taxpayer’s return and checks box A in Part II on page 1 of the Form 2210. The taxpayer should also write in the statement, “Received excess advance payment of the premium tax credit.” No other documentation or calculation is required according to the IRS notice.

Overall, the premium tax credit will cause some taxpayers sticker shock, but the IRS has created opportunities for taxpayers to reduce or eliminate penalties stemming from the ObamaCare premium tax credit.

The Windsor Decision – One Year Later

Posted on by Alison Warden


One year ago this month, Edie Windsor won her case in the U.S. Supreme Court, securing a refund from the IRS of the $363,000 estate tax bill that she paid upon the death of her spouse (and partner of more than 42 years) Thea Spyer. The tax would not have been due had the couple’s marriage been federally recognized. The Court’s decision in United States v. Windsor paved the way for surviving spouses to claim the federal estate tax marital deduction on property inherited from a same-sex spouse.

But United States v. Windsor is more than an estate tax case. It has been hailed as one of the most important civil rights cases of our time, with far-reaching effects in every corner of federal law pertaining to families. Until the Windsor decision was issued, DOMA’s Section 3 limited federal recognition of marriage to those marriages between a man and a woman. In the 5-4 opinion authored by Justice Anthony Kennedy, the Court struck down Section 3 as unconstitutional, requiring the government to treat same-sex spouses and opposite-sex spouses equally for all purposes under federal law.

Implementation of the Ruling

Although the concept of equal treatment is straightforward, implementing Windsor has proven to be anything but simple. Since Windsor, the Obama administration has worked toward expunging Section 3’s effect from “every federal law, rule, policy and practice in which marital status is a relevant consideration,” according to a report issued by Attorney General Eric Holder earlier this month.

Over the past year, dozens of federal agencies have grappled with complex legal issues in implementing Windsor, such as how far back a same-sex marriage must be recognized (retroactivity), whether legal marriages should be recognized based on the state in which the couple was married or the state in which they live (“state of celebration” vs. “state of domicile” rule), and whether federal or state law should govern federal benefit programs administered by the state (choice of law).

Due to widely differing state laws related to the recognition of same-sex marriage – 19 states and the District of Columbia allow same-sex marriage, while 31 states do not – the impact of Windsor has not been uniform, even across federal law. For example, if a couple were legally married in Washington state in 2012 but now lives in Arizona, they would be treated as married by the IRS for federal tax purposes but would not be eligible for Social Security spousal benefits. But despite the ongoing challenges, dozens of federal agencies have rolled out guidance over the past year as to how they will implement Windsor, and several answers are now available. Some highlights include:

Federal Taxes:  The IRS will recognize same-sex marriages lawfully performed in any state or foreign jurisdiction for all federal tax purposes no matter where the couple lives (“state of celebration” rule). See Revenue Ruling 2013-17. In the estate tax realm, same-sex spouses may now take advantage of planning options such as the marital deduction, portability of a deceased spouse’s unused exclusion amount, the double-step-up in basis for community property assets, QTIP trust planning, and lifetime tax-free gifting between spouses. On the income tax front, the IRS now requires same-sex married couples to file as “married” – whether jointly or separately – from tax year 2013 forward. See IRS publication titled Answers to Frequently Asked Questions for Individuals of the Same Sex who are Married under State Law. While this may simplify tax filings for same-sex spouses, particularly in community property states, such as Washington, where complex income-splitting rules used to apply, the income tax result will likely be different. Couples may experience a marriage “penalty” or marriage “bonus,” depending on each couple’s specific situation.

Immigration:  Department of Homeland Security and the U.S. Citizen and Immigration Services (USCIS) have announced that lawful same-sex marriages will be treated as valid for U.S. immigration law purposes no matter where the couple lives (“state of celebration” rule). See USCIS, Same-Sex Marriages. This means that U.S. citizens and lawful permanent residents can now file petitions to sponsor their same-sex spouses for family-based immigration visas, and similarly can file petitions based on engagement to a person of the same sex. All other immigration benefits conditioned on marriage or status as “spouse” can now include same-sex marriages. Additionally, USCIS is also reopening all previously denied immigrations petitions and applications denied solely because of Section 3 of DOMA.

Social Security: The Social Security Administration (SSA) will extend social security retirement benefits to same-sex spouses, but only if the individual who paid into Social Security is domiciled in a state that recognizes the marriage at the time of the application, or while the claim is pending (“state of domicile” rule). See Program Operations Manual System, Same-Sex Marriage – Benefits for Aged Spouses. The “state of domicile” rule applies in the context of Social Security as well as in the context of Veterans’ benefits because a federal statute requires SSA and Department of Veterans Affairs (DVA) to extend marriage-related benefits based on the law of the state in which the married couple resides or resided. A handful of bills have recently been introduced in the legislature to change this, including the Social Security and Marriage Equality Act introduced by Senators Mark Udall and Patty Murray, but until such legislation is passed, the “state of domicile” rule will likely continue to be applied by SSA and DVA.

On another note, SSA has indicated that it will process claims involving non-marital legal relationships – such as a domestic partnerships or civil unions – if the state law in which the couples resides allows the claimant to inherit from his or her partner on the same terms that a spouse could inherit. See Social Security – Same Sex Couples, Important Information for Same-Sex Couples; and Processing Instructions, Non-Marital Legal Relationships. This may be a significant consideration for non-married couples in deciding whether to wed – even in marriage recognition states such Washington, which allows domestic partnerships for couples with at least one partner over the age of 62 and confers spousal inheritance rights on such partners under state law. The SSA is encouraging such couples to apply for benefits.

IRAs and Qualified Retirement Plans:  The IRS’s “state of celebration” rule extends to retirement plans such as 401(k) plans (also referred to as “qualified retirement plans”) and IRAs. See IRS Notice 2014-19. Same-sex spouses can now take advantage of the spousal rollover rules allowing them to roll their deceased spouse’s 401(k) plan or IRA into their own IRA and treat it as their own, which often results in stretching out the tax deferral benefits inherent in such plans. Same-sex spouses should also be aware that “spousal consent” rules apply – for example, in situations where a spouse wants to leave the retirement plan benefit to someone other than the spouse, or when a spouse wants to take a loan against their 401(k), the other spouse must consent in writing. Spouses may need to update beneficiary designations to ensure these rules are complied with.

Windsor’s Momentum Continues

A year after the Court’s decision in Windsor, the case’s momentum is still strong. According to Freedom to Marry, litigation is underway in all 31 states in which same-sex marriage bans still exist. In the past week, the U.S. Court of Appeals for the Tenth Circuit ruled that state same-sex marriage bans are unconstitutional – an issue that was sidestepped by the Supreme Court in Windsor’s companion case, Hollingsworth v. Perry. Meanwhile, on June 27, 2014, two just two days after a U.S. District Court’s decision struck down a same-sex marriage ban in Indiana, the U.S. Court of Appeals for the Seventh Circuit issued a stay of the District Court’s ruling, putting a halt to same-sex marriages in Indiana. The U.S. Supreme Court will likely be asked to rule upon the issue of a state’s right to ban same-sex marriage again soon.

Finally, change continues to be afoot even here in the state of Washington, which has recognized same-sex marriage since 2012. Today, June 30, all Washington state domestic partnerships – with some limited exceptions – will automatically turn into marriages. This time of change means that the legal landscape – even those in marriage recognition states like Washington – is still in a state of flux for same-sex spouses.

We at Amicus Law Group, PC, are committed to staying up to date on these important issues and assisting our clients with navigating their estate, tax and business planning to their greatest advantage with all of these developments in mind.

Alison J. Warden is an estate planning and tax attorney with Amicus Law Group, PC. Amicus is a law firm in Seattle, Washington that focuses on tax planning and compliance, estate planning, business planning, tax controversy, and self-directed IRA consulting. Alison can be reached at


Newsflash: Tax Court Deems Attempted IRA Investment To Be Taxable IRA Distribution

Posted on by George Munro

In order to invest in real estate, private placements, or other unique investments with your self-directed IRA, you must use an IRA custodian that allows specialized, self-directed IRA investments rather than a traditional IRA custodian such as Charles Schwab, Vanguard, etc.  On June 5, 2014, the Tax Court emphasized this point in Dabney v. Commissioner.  In the case, the Tax Court ruled that an investment into real property on behalf of a self-directed IRA was actually a distribution from the IRA and subsequent personal investment.  The ruling was based on the fact that Schwab’s boilerplate IRA trust language did not allow for investments into real property.

Case Summary:

Prior to his real estate investment, Mr. Dabney held his IRA funds with Charles Schwab.  After Schwab informed Mr. Dabney that alternative IRA investments such as real property investments were not allowed with Schwab IRAs, Mr. Dabney nevertheless used $114,000 from his Schwab IRA to purchase real property, ostensibly on behalf of his IRA.  Schwab treated the transaction as an early IRA withdrawal, and issued Mr. Dabney a 1099 reflecting the same.  When Mr. Dabney, failed to report the 1099 income on his tax return, the IRS issued a deficiency notice, and Mr. Dabney challenged the deficiency at Tax Court.

Mr. Dabney made two primary arguments on why no IRA distribution had occured, but the Tax Court ultimately disagreed with both of his arguments.

First, Mr. Dabney argued that the $114,000 real estate investment was a purchase by his IRA.  In regards to this argument, the Tax Court ruled that the Schwab IRA did not purchase the property.  IRAs must be governed by a written document, and the Schwab IRA trust document did not allow the IRA to invest in real property.  Because the Schwab IRA trust document did not allow real property investments, Mr. Dabney’s real property acquisition could not have been purchased by the IRA.  Therefore, the Schwab IRA did not purchase the property.

Second, Mr. Dabney argued that the property acquisition was a transfer between IRA trustees.  The Tax Court disagreed, saying that Mr. Dabney was not the trustee of any IRA or other qualified retirement plan.  Because Mr. Dabney was not, there was no trustee-to-trustee transfer.  Because there was no trustee-to-trustee transfer, the entire distribution was fully taxable to Mr. Dabney.

The full Tax Court opinion can be viewed at:

Dabney v. Commissioner stresses the vital importance of properly structuring any self-directed IRA transaction.  While Mr. Dabney was correct that IRAs can hold real estate for investment, Mr. Dabney did not properly structure the transaction by rolling the funds over to a willing, self-directed IRA custodian.  Because the transaction was not properly structured, Mr. Dabney ended up with a large, avoidable tax bill.


George A. Munro is a tax attorney with Amicus Law Group, PC.  Amicus is a law firm in Seattle, Washington that focuses on tax planning and compliance, business planning, estate planning, and self-directed IRA consulting.  George can be reached at    

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