In a ruling that may provide an option for a deduction of what had become otherwise nondeductible investment advisory fees, the IRS in PLR 201945001[1] (and a series of nearly identical rulings issued at the same time) allowed an insurance company to treat investment advisory fees paid out of an annuity contract as an amount not received by the owner of the annuity under IRC §72(e).

Although investment advisory fees are considered expenses related to the production of income under IRC §212, they are treated as a miscellaneous itemized deduction for individuals.  For tax years beginning after 2017 and before January 1, 2026, such items are not deductible for individuals pursuant to IRC §67(g).

A qualified retirement plan can provide for loans to be made to participants under the terms of the plan if the plan provisions comply with the requirements under IRC §72(p)(2).  The loan must require repayment within five years, have payments made at least quarterly, and there must be a level amortization (that is, equal payments).  If a participant fails to comply with the terms of the loan, the balance is deemed distributed to the participant.

Reg. §1.72(p)-1, Q&A 10 allows a plan to include a “grace period” to allow participants to correct missed payments.  Under these provisions a missed payment must be corrected by the end of the calendar quarter after the calendar quarter in which the missed payment took place.  While a plan does not have to allow for a grace period, most plans will provide for this since otherwise any sort of problem would trigger a deemed distribution to the beneficiary.

In Chief Counsel Memorandum 201736022 the IRS looks at two situations to determine if the grace period rules have been complied with.

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Actress Helen Hayes is not often quoted in Tax Court proceedings, but this case the court referenced her statement that “age is not important unless you are a cheese” as an introduction to a case that dealt with a situation where age was important to more than cheese. The case of Omoloh v. Commissioner, T.C. Summ. Op. 2017-64.

The issue in this case arose because Mr. Omoloh had taken a distribution from an individual retirement account. The question was whether Mr. Omoloh was over age 59 ½ and thus not subject to the 10 percent additional tax on premature distributions from his IRA.

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There was no question that the taxpayer in the case of Gowen v. Commissioner, TC Summ. Op. 2017-57 had defaulted on the loan he received from his former employer’s 401(k) plan and, as well, that he did not correct the default prior to the cure period allowed under the plan.  But the taxpayer argued that the actual deemed distribution did not take place in 2012, the year the deemed distribution was reported by the plan custodian on a Form 1099R, but rather at some point in 2013.

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A participant in a qualified employer retirement plan may, if the plan allows it, borrow funds from the plan.  However, such borrowing is subject to a number of specific provisions in federal law and regulations.  Violation of the provisions regarding repaying the loan results in its treatment as a distribution from the plan, taxable to the participant.  That’s true even though the participant remains liable to repay and does actually repay the loan to the plan.

In the case of Frias v. Commissioner, TC Memo 2017-139 there was little question the written terms of the loan had not been followed—but the failure had been due to a failure by the employer to fulfill its obligation to withhold the payment from Ms. Frias’s checks she received while was on maternity leave.

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In the case of McGaugh v. Commissioner, Case No. 13665-14, CA7 the taxpayer had wired funds from his IRA account to purchase stock which we expected to be held in his IRA account.  However, the taxpayer’s IRA custodian refused to accept the share certificate that was received.  The IRS took the position that this resulted in a taxable distribution to the taxpayer from the IRA account.

The Tax Court decided that the taxpayer had not actually or constructively received a distribution from his IRA. (TC Memo 2016-28)  The IRS, not happy with this result, appealed the case to the Seventh Circuit Court of Appeals.

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The IRS Tax Exempt and Government Entities division has published guidelines (TEGE-04-0417-0016) for agents to use to determine if the rules of IRC §72(p)(2) have been followed regarding the maximum amount an employee may borrow from a qualified retirement plan.

Under IRC §72(p)(1) a loan to a plan participant is to be treated as a taxable distribution to the participant.  However, if the loan meets the requirements of IRC §72(p)(2) it will not be treated as a taxable distribution.  Obviously, since an employee isn’t likely to want a loan on which he/she pays tax on and then still must repay, plans that offer loans generally have terms that require the loan to comply with the provisions of IRC §72(p)(2).

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The tax law doesn’t often work the way we like it to, and in the case of Tobias v. Commissioner, TC Memo 2015-164 the taxpayer’s argument that, when viewed as a whole he hadn’t really seen income from a series of transactions was not availing.

The taxpayer in this case was an attorney who held an inactive CPA license.  In 2003 the taxpayers had purchased an annuity for $228,800.  In order to buy the annuity the taxpayer had sold securities at a loss of $158,000.  The taxpayers continued to make contributions to the annuity through 2006 of $346,154. 

The situation the taxpayer faced in the case of Morris v. Commissioner, TC Memo 2015-82 is one that will be all too familiar to many of us—a case of a taxpayer doing something unaware of the negative tax consequence.  It also is a case of a client reading more into advice received than the adviser expected the taxpayer would do—and, again, with negative consequences.

The result in this case should not be surprising to any tax adviser reading this—Elroy was the primary and sole beneficiary of his father’s IRA.  Elroy received a distribution of his father’s IRA as he was the sole beneficiary of the IRA.  But his father had indicated that he wanted a portion of the IRA to be shared with Elroy’s two siblings, so he paid checks to them for $37,000.