Discussion:Tax Benefit Rule - Capital Loss Recovery - Death
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Discussion Forum Index --> Advanced Tax Questions --> Tax Benefit Rule - Capital Loss Recovery - Death
Discussion Forum Index --> Tax Questions --> Tax Benefit Rule - Capital Loss Recovery - Death
| 6 October 2007 | |
| It is well established under Code Sec. 111, that one does not have to include in income any recoveries of previously deducted items, if such prior year deductions did not actually reduce the taxes owed in that year. Instead it is considered to be a recovery of basis and as such is not taxable. My situation deals with a taxpayer who incurred large capital losses as a result of option trading online. Taxpayer passes away and is unable to use any of his capital losses (only $3,000),in his final return, so he has a $200,000 capital loss carryover which is unusable and lost forever because of his death. In the following year, his estate receives a $10,000 settlement from the broker as a result of a mediation resolution. The estate says this money is non taxable because of the tax benefit rule and is a recovery of basis because the individual never got to deduct the losses. The IRS says the settlment is taxable because the tax benefit rule doesn't apply to unused capital losses that are lost due to death. Who is right and why?
P.S. the $3,000 carryover used was part of a $60,000 prior year capital loss carryover. | |
Death&Taxes (talk|edits) said: | 6 October 2007 |
| Wait for Dennis and others who know more about this, but I do wonder if the claim would not be an asset of the estate, to be valued at $10,000. | |
| 6 October 2007 | |
| Definitely an estate asset and most probably an asset of an estate under audit because that is the only way something like this can be picked up. Otherwise it is a nicely phrased taxprof question.
If under origin of claim the settlement is restoration of basis you have to take into account the change in basis due to date of death revaluation. Excess of recovery over basis is capital gain. Settlement would have been taxable to the decedent regardless of the fact that carryforward would have eliminated the liability. What makes me suspect the taxprof is that if the settlement had been non-taxable to the decedent because restoration was less than basis it would still be taxable to the estate. The carryforward is a red herring, and frankly I don't see an application of §111. | |
| 6 October 2007 | |
| Not sure if my last post got posted: This question is not about including the recovery in the estate as an estate asset. Assuredly, it is. It is about whether an estate steps into the shoes of the decedent as far as Sec. 111 is concerned and whether the estate has a taxable event in the same character as the deduction claimed by the individual, i.e. capital loss and whether the estate can rely on the fact that the decedent did not receive a tax benefit from his capital losses and therefore his estate has no taxable event from the broker settlement because it is entitled to a reduction of basis?
Please provide citations if you have them available. Thanks, Compubuff | |
| 6 October 2007 | |
| Give my regards to your professor. Very nice question. Extra credit if you can deal with the specific case where decedent still held the securities, recovery was less than basis and the settlement was agreed to prior to death. | |
| 7 October 2007 | |
| I agree with Dennis, Sec. 111 has no application here. The recovery is Sec. 691 IRD. Fully taxable in this case. | |
| 7 October 2007 | |
| Sorry, Riley2, I have to disagree with you. This settlement recovery is not IRD income. Perhaps some additional facts will clarify. The decedent passed away in November of 2006 and the arbitration claim was not initiated by his estate until February of 2007. $10,000 mediation recovery settlement was agreed to in July of 2007 and paid in August of 2007. Since TP was not entitled to the money at the time of his death, there is no IRD. Dennis, this is an actual case and there is no professor involved. If it appears that I am a professor, it is only because I have an in-depth understanding of the tax law and realize that often there are questions whose answers depend on interpretations of the tax code, whose sections are often conflicting. | |
| 7 October 2007 | |
| Rather than a professor, you have the appearance of of a lazy, inept student. If this a real case the IRS is correct. Pay the $2. | |
| 7 October 2007 | |
| I didn't realize that this forum was about immature name calling and cynical remarks. What a shame to have to resort to such childish antics. I am out of here! | |
| October 10, 2007 | |
| All:
Compubuff contacted me and stated that he is a retired CPA with a specialty in taxation, and is not a student. While I understand that questions from students and non-professionals have become a problem here, we need to keep the responses civil. See the Code of Conduct. Thank you, - Tim Doyle, TaxAlmanac Moderator - Talk to me 11:02, 10 October 2007 (CDT) | |
| 10 October 2007 | |
| Tim - the simple answer would be to keep the DIYers OFF THE BOARD. Then we wouldn't assume that a questioner WAS anything but a professional!!! | |
| October 10, 2007 | |
| Kevin:
I agree - look for a change in that respect shortly. - Tim Doyle, TaxAlmanac Moderator - Talk to me 11:56, 10 October 2007 (CDT) | |
| 10 October 2007 | |
| I take exception to the insinuation that my comment was uncivil. The likelihood that a retired CPA with a specialty in taxation would ask that question is non-existent. Note also the complete lack of understanding of the answers given. The gentlemen made an assumption concerning my opinion of his expertise and I informed him otherwise. | |
| 10 October 2007 | |
| Dennis, re-read the part where you wrote ' you have the appearance of of a lazy, inept student '. I have found it easier just to link to the thread
Discussion:This Forum is for Tax Professionals - Please Fill Out Your Profile | |
| 10 October 2007 | |
| Also, we all have been utterly amazed at the questions many people ask - many with much experience in tax practice. | |
| 10 October 2007 | |
| None of which is similar to a claim of specialty in taxation. I had no problem answering the question, Kevin. I merely objected to his delusion. | |
Death&Taxes (talk|edits) said: | 10 October 2007 |
| check a bad debt question just posted. In the OP question, Riley is the first to acknowledge if he erred; the man was dead, the estate filed a claim more on his behalf, similar to one for wages unpaid. I cannot understand the almost Jesuitical reasoning used why this would not be IRD, and how the OP's reasoning changed after the first batch of answers.
There is one semi-regular professional who always argues with any answer. This can get frustrating. | |
| 10 October 2007 | |
| And there are those who teach courses about 1041's? ♫ Give it a rest. We are talking about someone who read my original answer and actually came to the conclusion that I thought he was a professor because of his "in depth understanding." | |
| 10 October 2007 | |
| I am replying just this one last time out of courtesy to Tim, who agreed with me that this forum should not be used to demean people by making sarcastic, cynical or other insulting remarks. If you can't reply to a legitimate question in a mannerly way, then I don't think you belong in this forum. Yes, I am a professional. I am a retired CPA with over 40 years of professional experience. In my early years in accounting, I worked for the IRS as a field agent and if you know anything about the training you receive there, you will realize that the six month basic and six week advance tax courses are probably the best training one can receive in taxation. This training was followed by my training in the tax department of a large accounting firm and subsequently my experience in public practice. And yes, from time to time, I did teach accounting and tax subjects at a local college. My title was assistant professor. Now that you have read my bio, I will also tell you that the case I presented was real and the decedent in the question was my son, who passed away last December from lung cancer. You can't get much more real than that. I stumbled across this forum and thought it would be a good place to present my question. Sadly, it turned into a cynical exchange of rhetoric, some of which questioned my authenticity as a professional. I hope that this note will satisfy all of the elitist egos and that my question can be addressed with the dignity that it deserves. | |
| 10 October 2007 | |
| Compu, I am so sorry to hear about the loss of your son. Unfortunately, I don't have any answers to your question that haven't already been proposed. | |
| 11 October 2007 | |
| Riley - instead of IRD, couldn't the 10K be perceived as a restoration of capital? I'm not sure but will throw this out in an effort to help Compu. I think Raytheon Production 32 AFTR 1155 is an early authority.
General Counsel Memo 35967 has a passage which I'll paste below. I think it might help Compu. Appreciate your (and others) thoughts on this. [start]The general rule for determining whether damages (received from suit or settlement) are includible in gross income is that the damages are of the same nature as the items for which the damages are a substitute. ...(citations omitted).... If the damages are a substitute for amounts that would have been includible in gross income, the damages are includible in gross income. Thus, damages received for lost profits or lost wages are includible in gross income. ...(citations omitted) .... On the other hand, if the damages represent a restoration of capital, the damages are not includible in gross income. Thus, amounts received for injury to capital, for damage to goodwill, and for damage to business or business property are not taxable unless the amounts received exceed the taxpayer's basis [end] The 10K (if a recovery of capital) would be an offset to the capital losses. Is the timing (i.e. the different years) a problem? Given the nature of the situation, I don't believe it is. | |
| 11 October 2007 | |
| NYEA. That is precisely the point. Restoration of capital in excess of basis is income. If claimant has sold the stock he has zero basis and the settlement is all income. (That's how we get the IRD) If the estate still holds the stock it is revalued as at date of death and the entire settlement is excess. The odd case in which the stock is still held, claim is made prior to death and the actions of the executor are purely ministerial will exclude from income restoration of capital up to original basis. | |
| 11 October 2007 | |
| Compubuff, thanks for the clarification regarding the timing of the recovery.
Section 111 limits the taxability of a recovery of a previously deducted item; however, the person receiving the refund must be the same as the person who claimed the deduction. Thus, no Sec. 111 relief is available here. Let me know if you need the TC cite on this. Since the action was initiated after death, I am not really sure the client has any basis in the recovery under Sec. 1014. Was the value of the expected recovery included in the gross estate? As an aside, I think that you will receive a better reception from the regular contributors to this forum after you have made a few contributions yourself. | |
| 11 October 2007 | |
| I can certainly understand Compubuff's anger. I, for one, have quit posting comments to any of these questions simply because I got sick and tired of hearing all the insults and snide remarks. Maybe I am just too sensitive, but I clearly understand that when expressing an opinion on a tax matter, maybe I am wrong and would appreciate clarification. However, there are too many posters here who know everything (and if you doubt me, just ask them. They will tell you). Not only are they experts on all issues, but they have no equal in putting people down, trying to impress others with their vast knowlege. Oh well, I know this post will never change them, but at least maybe they can see themselves for what they really are. | |
| 11 October 2007 | |
| I agree with you Neil, I have felt the same way, and now only post questions when I have tried every other resource I can think of. It still doesn't stop me from reading all posts that interest me, and I still learn a lot - but it sure stops me from contributing. I have over 300 clients that think I'm a great CPA, but one or two contributors here can make me feel stupid. For the most part, I wouldn't trade this forum for anything, and most regular contributors are fantastic (even the smart aleck ones give good advice) :) | |
| 11 October 2007 | |
| Thanks for your support, Brensan. I, too, like the forum and like to read about the issues presented, but as far as expressing my opinion, forget it. | |
| 11 October 2007 | |
| I have to chime in. Some people enjoy teaching because they like to see people learn others because they like to show how smart they are. | |
| 11 October 2007 | |
| I do hate to disagree with Riley, but for hypothetical §111 purpose the estate is the same person. An example would be a state income tax refund. | |
| 12 October 2007 | |
| Dennis, I am in full agreement that IRD retains its character when received by the estate. However, the original poster was confident that this was not IRD. | |
| 12 October 2007 | |
| I do love the manner in which you phrase your responses, Riley. I too shall await the benefit he will bring to this forum. | |
| 8 November 2007 | |
| You holdin your breath for that fella to come back after shootin off your mouth like that? You think you could say you was wrong and you is sorry, mebbe even leave him a message, mebbe ask the moderator to send a sorry email to him? Or you just gonna sit there and wait and turn blue? Im downright surprised you would bring up this and call attention to your shamefulness. Easy to chase folks off. Did you read what them young fellas said how they are scairt to say anything? That aint right.
Aunt Emmy thinks the world of you Dennis and you are most always a real smart high class act. Cant understand why you aint just out with an apology if you think its important enough you give a bump to this thread. Why you showin this to us if you dont feel bad about it? | |
| 8 November 2007 | |
| Obviously Aunt Em believes that Compubuff is what he says he is and actually has such in depth knowledge of taxation that I would confuse him with a professor. What I am waiting for is participation in this forum that would demonstrate his expertise. Perhaps Aunt Em (or any of the other believers) will at at least elucidate the tax principals that support his instant case? | |
| 8 November 2007 | |
| Aunt Emmy, I know we are suppose to keep these discussions on a professional level, but I think I'm falling for you. You are a BABE! And love the hat.
And everybody else out there: Think of some of the wildest and coolest things you've done in your life. Now imagine doing them with that big black hat on. Nice. | |
Death&Taxes (talk|edits) said: | 8 November 2007 |
| Will anyone, the OP or anyone else, try to fit PLR 200744001 into the parameter of this query though in that one, which was in the RIA Newstand yesterday, the transaction, a aale of property, was begun before death? "Unforeseeable circumstances" seemed to be the reason that IRS held that sale not to be IRD, but any port in the storm. | |
| 8 November 2007 | |
| The reasonably seminal case is Estate of Peterson v. Commissioner, 74 TC 630, 639-641 (1980), aff'd 667 F2d 675 (8th Cir 1981), where the court set forth four requirements in order for sale proceeds to constitute income in respect of a decedent.
1. The decedent entered into a legally significant arrangement such as a contract disposing of the subject matter of the sale. 2. The decedent performed the substantive (non-ministerial) acts required as preconditions of the sale. 3. No economically material contingencies existed at the time of the decedent's death, which might have disrupted the sale. 4. The decedent would himself have eventually received the sale proceeds had he lived. In the fact pattern set forth in the letter ruling items two and three would seem to apply. | |
| November 8, 2007 | |
| I hadn't read this thread until now, not having any expertise in estate things but always willing to learn from Dennis.
This is absolutely heartbreaking. Words...escape.
| |
| 8 November 2007 | |
| I answered the question, JR, (as did Riley, who in my opinion was the one actually offended...Sorry to disagree with you but I have an in depth knowledge of taxation and you'll just have to take my word for it(?)) ). An interpretation was offered as to what I thought and I corrected it. There has been much hoo hah here regarding profiles. I find this instance illustrative. From my perspective there is more evidence of personality disorder than knowledge, but I am certainly willing to suspend judgement and wait for evidence.) | |
| November 8, 2007 | |
| Didn't mean to point directly at you Dennis. You've been overly patient with all of us and rarely make an untoward comment. Perhaps the trouble is all about 'who is posting?' instead of accepting that whoever it is is a real person, and to just answer the question or don't. Otherwise, we hurt people. Compubuff isn't coming back. Why would he? And like Neil and Bresnan, I wonder how many others we've run off? For what? So that we can smugly say that we have a pro only club? | |
