ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, April 1, 1996 TAG: 9604010092
SECTION: BUSINESS PAGE: 6 EDITION: METRO
COLUMN: tax questions
Q: When you receive a lump sum from an employer or company, can this be deferred until a later year, or would it be to my advantage to claim it in the tax year received?
A: A lump-sum payment from your employer for early retirement is taxable in the year received. It cannot be deferred to a later year. -Answered by William R. Brumfield Jr. of Foti, Flynn, Lowen & Co.
Q: I am one of the residents of Virginia who received (and will receive several times more) a "federal retirement settlement payment" from the commonwealth of Virginia. About Feb. 1, I received a Form 1099-G from the Virginia Department of Taxation, which noted the settlement payment received by me in 1995, plus information regarding how that payment amount was allocated by calendar years 1985, 1986, 1987 and 1988, and that I had itemized deductions for each of those years.
At the bottom of the 1099-G sheet, the Virginia Tax Department notes: "If you have questions concerning how to include this information in your Federal Income Tax Return, call the Internal Revenue Service at 1-800-829-1040."
I have called that number and wasted hours waiting for a human to come to my assistance. Examining their own 1040 booklet is of little help - unless one knows what terminology the IRS uses to translate "retirement settlement payment." Note, too, that the gross settlement amount approved by the commonwealth was, in most cases, 76 percent of the actual overpayment, a built-in state tax.
Can you tell me where on my 1995 1040 return I am supposed to enter this information?
A: If you receive a state or local income tax refund, you may receive a Form 1099-G, Certain Government Payments. The following items, such as the refund on the 1099-G, are considered recovery items: state and local income tax refunds, interest, recoveries from amounts claimed as itemized deductions from previous years' Schedule A Form 1040 or a Federal Retiree Settlement Program payment.
There are several scenarios that could impact the way you report these recoveries on Form 1040. However, let's assume for the earlier year(s) the following situation: (1) your itemized deductions were not subject to limitations; (2) the deduction for the item recovered exceeded the amount recovered; (3) you had taxable income; (4) the itemized deductions exceeded the standard deduction by at least the amount of the refund; (5) you had no tax credits; and (6) you were not subject to the alternative minimum tax.
If you meet these six criteria, the total recovery is included as income on your federal tax return Form 1040 as follows: (1) interest, if any, on line 8a and (2) state and local refunds, such as the Federal Retiree Settlement Program payment, on line 10.
As for reporting this information on your Virginia state return Form 760, the amount shown as income on your federal tax return Form 1040, line 10, would be subtracted from income on line 33 in the appropriate column.
If you have any further questions, you may want to review IRS Publication 525, Taxable and Nontaxable Income. -Answered by Timothy Boitnott of Miller, Morgan, Agee & Clem
Q: In 1992, I invested $10,000 (1,000 shares) in a short-term bond fund. All dividends were automatically reinvested by the fund. In September 1995, I sold all shares owned (now totaling 1,300) at a loss.
How do I figure the cost basis of the 1,300 shares to arrive at my loss? Can the individual year's 1099 forms be used to figure the cost of the shares from reinvestment?
A: The basis of your original 1,000 short-term bond fund shares acquired in 1992 is equal to your cost of $10,000. If the remaining 300 shares were acquired with reinvested dividends, then, generally speaking, annual amounts reported as dividends on the 1099-DIV forms would represent the cost basis of the shares purchased with reinvested dividends.
IRS Publication 564, Mutual Fund Distributions, recommends that taxpayers participating in automatic dividend reinvestment plans keep the statements that show each date, amount and number of full or fractional shares purchased. Generally, taxpayers are required to know the basis per share in order to compute gain or loss upon disposing of the shares. The amount of an ordinary dividend or capital gain distribution used to purchase a full or fractional share is the cost basis of the share.
Establishing the cost basis per share is important since taxpayers have to separate their capital gains or losses into long- and short-term gains or losses. Full or fractional shares acquired under an automatic dividend reinvestment plan are considered purchased on the date each share is purchased for you. Shares acquired within the year preceding the sale date would generate a short-term gain or loss. Conversely, shares acquired earlier would produce a long-term gain or loss. -Answered by Stan Boatwright of Lucas & Boatwright
Q: I have two tax questions. They concern an interpretation of Code Section 1034 and component depreciation.
Code Section 1034 allows us to subtract the gain on house A from the basis on house B on acquisition. What if house A was sold below the basis? Can house B have this amount added to the basis? I think so; let's have your opinion.
Component depreciation (I had a number of rental properties under this) was banned in 1981 with the introduction of ACRS. This introduced recapture to fast depreciation.
The 1986 Tax Reform Act took back everything given in 1981 - and more. It did not say anything about component depreciation. Does this fact say that we can once more go with it?
A: Code Section 1034 applies only to the gain on the sale of your residence. If you have a loss on the sale of your residence, you cannot deduct the loss, and the loss has no effect on the basis of your new home.
Regarding component depreciation of buildings, under the law for property placed in service before 1981, taxpayers could depreciate both new or used buildings by this method.
Under component depreciation, a taxpayer allocated the cost of a building to its basic component parts and then assigned a separate useful life to each, with each component then depreciated as a separate item of property. Components generally included the building "shell," wiring, plumbing and heating systems, roof and other identifiable components.
The IRS claimed abuses existed in component depreciation, claiming taxpayers assigned unreasonably short lives to the components other than the basic shell.
The 1981 Economic Recovery Tax Act virtually eliminated component depreciation by requiring the same recovery period and method to be used for the building and its components using the newly enacted Accelerated Cost Recovery System (ACRS). Generally, this meant a 15-year statutory write-off using the 175 percent declining balance method.
The Tax Reform Act of 1984 increased the lives to 18 or 19 years.
The Tax Reform Act of 1986 brought about a dramatic change by limiting cost recovery to straight-line depreciation over 27.5 years for residential real property and 31.5 years for nonresidential. Subsequently, nonresidential real property placed in service May 13, 1993, and thereafter is assigned a 39-year life. Component depreciation has never been reinstated. -Answered by Terry Clem of Miller, Morgan, Agee & Clem
Q: I am one of five heirs of an estate. Everything was sold and divided equally among us, including the real estate. We, the heirs, never took possession of the real estate, and the sale was handled by the executor of the estate.
I received a 1099 form March 1 stating as gross proceeds my portion of the sale price of the real estate. I was told by the bank that sent the 1099 to complete a Schedule D form for capital gains or losses. The bank said if it was sold at the same value at which it was appraised at the time of death that there would be no capital gain, but, if not, there would be. If there was a gain, it would be taxable income.
I don't understand how I would have to do this for the sale of real estate that I never owned. The only distribution to the heirs was cash, and I believe if it is under $600,000, it is nontaxable.
I have already completed my taxes. They have been processed, and my refund check is in the mail to me.
Was it correct for the bank to send out the 1099 forms in this case? Is this the proper method of handling an inheritance of an estate where there is real estate involved? If it is, I assume I should do the Schedule D form. If it is not, what action should I take?
A: I assume the bank was responsible for closing the sale. That being the case, the bank is responsible for issuing the Forms 1099-S to the transferrers of the real estate.
If ownership of the real estate had been transferred to the heirs prior to the sale, then the bank was correct in issuing the Forms 1099 to the owners of record, i.e., the heirs. If the real estate had not been transferred to the heirs prior to the sale date, the estate would be considered the transferrer, and the bank should have issued the Form 1099-S to the estate. The executor should have provided timely information to the heirs regarding the sale and its consequences to them.
The distribution of real estate from an estate to the beneficiaries is usually handled in one of two ways, both of which are acceptable.
One alternative is to distribute the property itself to the heirs and let them liquidate the asset and divide the net proceeds. Based on the facts as you have described them, it seems likely that this was the alternative chosen by the executor in your case.
In this scenario, the beneficiaries must report their pro rata share of the sale of the inherited real estate on their individual returns for the year that the sale closes. The transaction will be reported on Schedule D. The sales price will be the amount reported on the Form 1099-S. Their cost basis would be their pro rata share of the property's fair market value at the date of death, plus their pro rata share of the selling expenses such as commissions, transfer and other legal fees, etc.
The fair market value (at date of death) of the property would normally be listed in the estate tax return or, if a return was not required, on the inventory filed with the local commissioner of accounts. If neither of these is available, the price at which the property was subsequently sold might be considered an acceptable measure of the fair market value at the date of death, i.e., the heirs' basis. This comparable sales approach to determining the property's estate value is available only if the sale was at "arm's-length" and the sale date was proximate to the date of death.
Again, the estate's executor should have provided you, and the other heirs, this information.
If an estate tax return was filed, the heirs must use as their basis the value of the real estate as reported in Form 706. The beneficiaries will recognize a long-term capital gain or loss depending on whether their share of the net sales proceeds is greater than (gain) or less than (loss) their pro rata share of the property's value for estate tax purposes. As previously mentioned, if no estate tax return or inventory was filed, the subsequent sales price might be an acceptable measure of the estate value provided the sale was to an unrelated third party and it was close to the date of death. Thus, the basis to the heirs would be deemed as equal to the sales price. This valuation would probably result in a long-term capital loss to the extent of the heirs' pro rata share of the expenses of sale.
If the estate was the transferrer (seller) of the property, then the beneficiaries should not report the sale on their individual returns and the bank should issue corrected Forms 1099 reporting the estate as the seller. The estate may or may not be required to file an estate income tax return.
My "bottom line" advice would be to contact the estate executor and request additional information. The executor really should have provided the heirs more guidance. -Answered by Mark F. Coles of H. Schwarz & Co.
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