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457 "constructive receipt"


Guest DennisDT

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Guest DennisDT

When I retired 5 years ago with a qualified 457 plan, I did not give a date certain for initiating distributions. At that time, I was uncertain as to when I would be needing the money and once a date for distributions was set, it could not be changed. I consulted with the plan's representative at our workplace re my dilemma and he told me to simply avoid notifying the plan's administration of my retirement. According to him, many people handled it that way. He said that if I notified the plan's administrators, they were required to keep after me for a date certain. I took his advice and left my money in the investment option I had chosen without setting a distribution date.

About a month ago, I ran across an article on 457 plans that included mention of a concept called "constructive receipt". If I understood it correctly, it seemed to imply that by not giving a date certain 5 years ago, the govt. considers that I was in full receipt of my 457 plans assets (even tho I have not received any money from the plan) and therefore I may be liable for taxes

on the entire amount over this 5 year period. Is this so???

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In theory, you should have been taxed when you separated from service, if you did not make an election at that time and if you had the right to take the money out at that time. On the other hand, after 5 years the IRS may not be inclined to pursue this one. In general, the statute of limitations on innocent errors on your tax return is 3 years from the date of filing or the deadline, whichever comes last. Although there may be a longer statute of limitations on "substantial understatement of income," as a practical matter the IRS is unlikely to come after you after 5 years if they haven't done so already. So it's probably in the interest of the IRS just to let you pay the tax when the money is distributed.

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Guest DennisDT

Thank you for the reply...I was unaware that I could be taxed for monies that I had not received. I hope you are correct and that no arrearages will be levied.

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There is another alternative available for aggressive taxpayers. Under case law the income is taxable in the year the amount was includible as income, regardless of whether it was reported as taxable to the employee. If the statute of limitations for collecting taxes in the year the amount was includible as income has expired then the IRS cannot levy taxes on the amount. The taxable distribution is treated as after tax monies. If you want to pursue this option then you should consult a tax advisor because the taxpayer has the burden of proving that the amount was includible as income in a year for which the s/l has expired. Otherwise you can treat the distribution as taxable in the year you receive it.

mjb

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I would advise a taxpayer who does not report 457 plan income under the constructive receipt rule that the income probably is taxable when received, because of the duty of consistency. See UAL CORPORATION AND SUBSIDIARIES v. COMMISSIONER OF INTERNAL REVENUE, 117 T.C. No. 2 (2001):

"In LeFever v. Commissioner, 103 T.C. 525, 541 (1994), affd. 100 F.3d 778 (10th Cir. 1996), this Court addressed the equitable doctrine of the duty of consistency:

'The "duty of consistency" is based on the theory that the taxpayer owes

the Commissioner the duty to be consistent with his tax treatment of items

and will not be permitted to benefit from his own prior error or omission.

The duty of consistency doctrine prevents a taxpayer from taking one

position one year and a contrary position in a later year after the

limitations period has run on the first year.'"

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As you note, the duty of consistency only applies to same taxpayer who causes the act to occur and subsequently tries to benefit from it. Duty of consistency does not apply where the act causing the omission of income by taxpayer A is the result of taxapyer's B's independent actions. See King Estate v. Comm, T.C. Memo 1984-343. (Failure of partnership to allocate accrued income to partner in prior tax year did not prevent partner from treating income as non taxable after s/l had run.) The failure to include 457 benefits as income was not due to employee's "error or omission" since employee relied upon incorrect advice by plan representative that by not setting the date the distribution could be deferred. Under IRC 6051 employer has legal duty to deliver W-2/1099 to employee -- employee has no obligation to request 1099 or determine whether it should be issued. The failure of the payor to report the income in year it was constructively received is not attributable to the employee any more than the employee would be liable if the employer incorrectly understated wages or income on the employees W-2.

mjb

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Guest Tom Geer

One additional thought. If the plan's representative gave bad tax advice, which is pretty clear, is there a cause oif action against that representative or the plan? Obviously more facts would be needed to fully evaluate the possibility, and oral advice is likely to be hard to prove, but it's worth a look.

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