This month’s Federal Tax News includes an IRS private letter ruling about tax-free IRA rollovers and one couple who dared to get too creative with their federal income tax return. On the business side, there are tax considerations for workplaces that support certain wellness programs and possible changes for financial services firms. Plus, museums, which are typically considered not-for-profit, may be coming under more scrutiny soon.
1. Tax-Free IRA Rollovers
You can roll over funds from one IRA to another tax-free as long as you complete the rollover within 60 days. But what if you miss the deadline? You may owe tax and an early distribution penalty if you’re under age 59 1/2. The IRS may waive the penalty if there are extenuating circumstances. In one recent private letter ruling (PLR 201617016), the IRS waived the 60-day requirement after a taxpayer failed to roll over the proceeds received from his IRA on time because he was the primary caregiver for his mother. He needed to attend to her daily medical needs and financial affairs. Waivers were also granted to two other taxpayers. In one ruling, the deadline was missed due to mistakes made by the taxpayer’s employer. In another ruling, errors by a financial institution caused the missed deadline.
2. Proof of Dependent Required
You must prove your child is a dependent to claim him or her on your tax return. In one case, the U.S. Tax Court denied a married couple’s dependency exemption deductions for a son who earned very little and lived at home. They didn’t show his age, if he was student, whether he lived with them, if they provided over half of his support during the years at issue, or otherwise establish that he met the tax code’s “qualifying child” tests. The couple also failed to prove that the husband’s father was a “qualifying relative” and could be claimed as a dependent. Although they offered evidence that the father stayed with them, the taxpayers didn’t show they provided more than half of his support or prove that his gross income was below the applicable exemption amount. (Ogamba, TC Memo 2016-105)
3. Wellness Programs
Attention fit workplaces: Does your business provide extra inducements to encourage employees to participate in a wellness program? Cash awards for partaking in wellness programs must be included in an employee’s gross income. In guidance from the Office of Chief Counsel (CCA 201622031), the IRS stated that an employer’s payments of gym memberships must also be included. And so must the reimbursement of an employee’s cafeteria plan pretax salary reduction used to pay for participation in such a program. Benefits defined as medical care or other “de minimis” benefits, such as T-shirts, can be excluded.
4. IRS Ruling Affects Financial Services Firms
The IRS has ruled that the Financial Industry Regulatory Authority (FINRA) is a “corporation or other entity serving as an agency or instrumentality” of the government. In other words, FINRA is effectively a government agency when enforcing securities regulations. Thus, if FINRA imposes a fine on one of its members for violating securities laws and regulations, it isn’t deductible as an ordinary and necessary business expense. Reason: Tax law bars deductions for fines or similar penalties paid to the government for violating laws. FINRA is a registered self-regulatory organization under the Securities Exchange Act of 1934. It has the authority to create and enforce rules for its members to provide regulatory oversight of securities firms that do business with the public. (CCA 201623006)
5. More Scrutiny for Museums?
Many private museums do “good work,” Sen. Orrin Hatch wrote in a letter to the IRS Commissioner, but the ability for them to receive tax-exempt status may be “ripe for exploitation.” Hatch, Chairman of the Senate Finance Committee, said some museums aren’t readily accessible to the public, are often closed, and require reservations weeks or months in advance. In addition, their collections mainly come from one donor or family and some museums sit on land owned by the founding donor or are adjacent to the donor’s private residence. These factors alone aren’t cause for revoking tax-exempt status or imposing tax on self-dealing, but Hatch wrote that they raise questions about the donor-museum relationship that “perhaps merit further scrutiny.”