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Please note that the question and answer provided does not take into account all options or circumstances possible.

April 28, 2016

Question: You have a new client with a Form 1099-MISC reporting a large amount in Box 2, Royalties. Upon further investigation you find out this royalty income is from a book the client authored. Is this income subject to self-employment taxes?

Answer: That depends. Royalty income reported in Box 2 of Form 1099-MISC does not tell us what we need to know to make this determination. According to Rev. Rul. 68-498, when an individual writes only one book as a sideline and never revises it, he or she would not be considered to be regularly engaged in an occupation or profession, and his or her royalties from the book are not treated as net earnings from self- employment. In contrast, if an individual prepares new editions of the book from time to time, and writes other books and materials, such activities reflect the conduct of a trade or business, and the income is includible in computing net earnings from self-employment.

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April 21, 2016

Question: If a taxpayer is under age 59½ and converts either a traditional IRA or qualified plan to a Roth IRA, is the taxable amount of the conversion subject to the 10% additional tax?

Answer: No. The conversion itself is not subject to the 10% additional tax [§408A(d)(3)(A)(ii)]. Form 1099-R should report the conversion using distribution code "2" in Box 7.

However, if any portion of a Roth conversion is distributed within five years of the conversion, that​ amount will be subject to the 10% additional tax, even if the distribution itself is nontaxable [§408A(d)(3)(F); Reg. §1.408A-6, Q-5].

For example, a taxpayer has $5,000 of basis in his only Roth IRA. The taxpayer converts $10,000 from a traditional IRA to this Roth IRA and includes the $10,000 as income. If the taxpayer withdraws $15,000 from his or her Roth within five years of the conversion, $10,000 will be subject to the 10% additional tax, even though the distribution is not subject to income tax.

April 14, 2016

Question: Jackson graduated from Marquette University in May 2015. Prior to graduation, he was a full-time student from January 3 through May 22. After graduation, he started working as a marketing assistant and was eligible to participate in his employer’s 401(k) plan. During the year, he made 401(k) contributions of $2,000 and had an adjusted gross income of $18,750. Since this is the first time he has participated in a retirement plan, he does not have any distributions from other plans. Can Jackson claim a credit on Form 8880, Credit for Qualified Retirement Savings Contributions, for his contributions to the 401(k) plan?

Answer: No. Jackson cannot claim a credit for retirement contributions on Form 8880 because he was a student. For this purpose, students include individuals who, during some part of each of five months during the year, are (a) enrolled at a school that has a regular teaching staff, course of study and regularly enrolled body of students in attendance, or (b) taking an on-farm training course given by such a school or a state, county or local government. A student is a full-time student if he or she is enrolled for the number of hours or courses the school considers to be full-time. Since Jackson was enrolled full-time at Marquette University from January through May, he cannot claim a credit for retirement contributions on Form 8880.

April 7, 2016

Question: Robert filed his partnership Form 1065 timely. Later, he discovered additional income and expenses that he failed to give to the preparer. An amended form needs to be filed for the partnership. When do you use a Form 1065X or check Box G(5) on Form 1065 to file an amended return for a partnership?

Answer: The answer depends on whether the amended return is filed electronically or on paper. If the return can be electronically filed, complete Form 1065 and check Box G(5) to indicate you are filing an amended Form 1065. Attach a statement identifying what lines were changed, the correct amount to report on that line and a reason for each change. If any of these changes affect the partners, also file amended Schedules K-1 for each partner and check the box “Amended K-1” at the top of the Schedule K-1. If the amended return will be filed on paper, complete Form 1065X, Amended Return or Administrative Adjustment Request (AAR). Attach any new forms, statements or schedules when amending the partnership return to identify items of income, deduction or credits.

March 31, 2016

Question: Must a taxpayer have earned income in order to make HSA contributions?

Answer: No. Although §219(f) requires a taxpayer to have earned income in order to make IRA contributions, there is no such requirement for HSA contributions under §223.

March 24, 2016

Question: John purchased 10 acres of land in 2000 for $75,000 and held it for investment. In 2010, the city condemned the land for the expansion of a highway. The city paid John $25,000 and he retained the rights to remove the gravel until 2015. John reported the sale of the land in 2010 using his basis in the land to determine gain or loss. John sold the gravel from the 10 acres in 2015 for $20,000. Is the gain from the sale of the gravel reported as capital gain or ordinary income?

Answer: John will report the gain from the sale of the gravel as ordinary income on his Form 1040. The basis in the gravel will be $0 resulting in the entire $20,000 reported on Line 21 as other income. The income is not subject to self-employment tax because John is not in the trade or business of selling gravel. John is also entitled to a deduction for depletion on Line 21. John reports the gain as ordinary income because he holds an economic interest in the gravel even after the condemnation [J.W. Sparkman, T.C. Memo 1972-201].

March 17, 2016

Question: A taxpayer explains to you that he sold his fully depreciated, 100% business-use vehicle for $10,500 and then purchased another vehicle for $10,500. The vehicle he purchased is used 100% personally. Does this qualify as a like-kind exchange and, thus, any gain is deferred?

Answer: No. This transaction does not qualify as a like-kind exchange under §1031 for two reasons; 1) the property acquired is not held for business or investment use, and 2) the transaction is not an exchange, rather a sale and purchase. Under §1031 the following requirements must be satisfied:

  1. The form of the transaction is an exchange.
  2. Both the property transferred and the property received are held either for productive use in a trade or business or for investment.
  3. The properties transferred and received are like-kind property.
  4. Since the taxpayer sold the vehicle and received cash and then purchased a personal-use vehicle, the taxpayer does not qualify under §1031 to defer the gain. 

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