Larry Starr

I would suggest the link given to you by the ESOP guy is not applicable. I would also suggest that your interpretation of having to count the time with the temp agency is also wrong. And when I say "I suggest", I'm not really suggesting! :-) The link ESOP Guy provided is dealing with someone who becomes a leased employee; your guys never do. We have used "temp to hire" several times over the years. If we eventually find someone we like, after the required time on the temp agency (which is just a couple of months as I remember) we can hire them on our own payroll without paying a fee. Their date of hire on our payroll is their date of hire for all of our benefits, including beginning counting for the retirement plan year or service. So..... you won't find the cite you are asking for because that interpretation is incorrect. Sorry!

I'm not sure why you bring up the housing allowance for ministers. That has nothing to do with an RMD. The RMD is a taxable distribution. The housing allowance is an amount paid by the church or congregation that is excluded from taxation if it meets the necessary criteria. The two have no connection.

In this case, he almost definitely is an investor and not a dealer. It is a complicated issue subject to much litigation. The following longish article discusses the issue quite well and I think you will see why this transaction is not going to make him a dealer in real estate. Larry. The dilemma of dealer or investor classification for real estate holdings INSIGHT ARTICLE | October 13, 2014 Title owners of real property need to be aware that various actions taken with regards to real property may affect whether a gain or loss on the sale of the property is capital or ordinary in nature. The actions (or inactions) taken throughout the life cycle of a real property investment determine whether or not specific real estate is held for investment or held as dealer property. Real estate deemed held for investment is subject to favorable capital gain tax rates, while real estate treated as dealer property is subject to less-favorable ordinary income tax rates. In addition to facing higher tax rates on dispositions of property, dealers in real property are precluded from using tax-deferral strategies such as installment sale treatment under section 453 and like-kind exchange treatment under section 1031. The issue of dealer versus investor classification has been frequently litigated. Because the federal tax code and regulations do not provide clear guidelines, taxpayers and their advisors must wade through numerous judicial interpretations involving a wide range of differing facts and circumstances in order to make a determination as to the appropriate classification. In general, the case law looks to five main factors in determining the proper classification of a taxpayer as either a dealer or an investor. As explained more fully below, a recent Tax Court case, Cordell D. Pool v. Commissioner of Internal Revenue, T.C. Memo 2014-3 (2014),provides a refresher course on the five main factors. It also serves as a reminder that taxpayers and their advisors need to analyze all of the specific facts and circumstances, document the known facts and the representations relied upon, and ensure all tax return filings reflect the appropriate status. The taxpayer bears the burden of proof in any dispute with the IRS. The five factors as explained in the Pool decision are briefly discussed below. Frequency and continuity of sales Frequent and continual sales of various parcels of real property may indicate that such sales are undertaken in the ordinary course of business, while infrequent sales, often for significant profits, are more indicative of real property held as an investment. In Biedenharn Realty Co. v. United States, 526 F.2d 409 (5th Cir. 1976), the frequency and substantiality of sales were analyzed as the two most important criteria in determining dealer status. In Suburban Realty Co v. United States, 615 F.2d 171 (5th Cir. 1980), a corporation held large volumes of land it had received from its shareholders. The corporation then sold more than 240 separate parcels to different buyers over a period of 33 years. The corporation engaged in no solicitation, advertising, development activity or subdivision activity and did not act as a broker. Despite other facts that would typically suggest capital gain treatment, the court found that the continuous sales activity by the corporation over 33 years and the large number of discrete sales (240 over a 33-year period) were overriding factors compelling the conclusion that the corporation was selling its land parcels as a dealer in the ordinary course of business. By contrast, the Tax Court in Buono v. Commissioner, 74 T.C. 187 1980, concluded that the taxpayer was entitled to capital gain treatment upon a single sale of land, despite the fact that the taxpayer was involved in activities related to zoning and subdivision. Buono acquired undeveloped land with the intention of subdividing the property into smaller lots to increase the property's value and promptly selling the property once it secured municipal approval of the subdivision. In Buono, the court reasoned that although the taxpayer was involved in subdividing and zoning activities, the land was disposed of in a single asset sale and should accordingly be treated as investment property eligible for capital gain treatment. The court reasoned that the taxpayer did not engage in frequent sales, did not make any improvements to the land, and engaged in the subdivision merely to make the land more marketable for sale by the party to whom it sold the subdivided tract. It should be noted that Buono was able to prove its intention from the beginning was to sell the land to a single buyer. Nature and extent of improvements and development activities If a taxpayer's activities with regards to a tract of land include subdividing, grading, zoning, or installing roads and utilities, the taxpayer may be deemed a dealer due to the nature of the development activity performed. It should be noted that this factor should be studied in relation to the particular parcel or tract of land involved. The mere fact that the owner of an investment parcel is also engaged in development activities with respect to other parcels should not be relevant to the tax treatment of a parcel genuinely held for investment. The courts closely study the specific facts and circumstances in a case where there is some level of improvement and development to real property in relation to the other four factors. Some cases in this area have allowed capital gain treatment despite a high level of development activity, and in other cases, mere zoning activities have tainted the property to be dealer property. In Pritchett v. Commissioner, 63 T.C. 149 (1974), the taxpayer was in the business of developing real estate and acquired a particular parcel of property that he intended to hold for investment. On prior year returns, the taxpayer recognized ordinary income on the sale of real estate that he held for development (parcels he subdivided and developed). In this case, the IRS argued the gain on the sale of the parcels that Pritchett claimed were held for investment should also be recognized as ordinary income, similar to the treatment of the parcels he sold in the past. The court found in favor of Pritchett and allowed capital gain treatment on the property because Pritchett made no effort to subdivide or improve the property and the property was sold after he received an unsolicited offer from a third party. Solicitation, advertising and sales activities Another important factor to explore in the determination of investor versus dealer status is the extent of the taxpayer's sales and marketing effort related to the disposition of a particular parcel of real estate. If the taxpayer advertises, markets, solicits customers, or merely lists the property for sale, it is more likely that there will be ordinary treatment on an ultimate sale. In Biedenharn Realty Co. v. United States, 526 F.2d 409 (5th Cir. 1976), cert. denied, 429 U.S. 819, the court denied capital gain treatment to a taxpayer that acquired land with the original intent to hold for investment. Although there were some other negative factors (some development and frequent sales), the court spent considerable time focusing on the taxpayer's solicitation and advertising efforts. The court noted the amount of signage used for marketing purposes as an important factor in concluding that the taxpayer was a dealer, not an investor. Furthermore, the court noted that the use of an independent broker to solicit sales does not shield a taxpayer from being treated as a dealer. This case is similar to others where a taxpayer may have some factors suggesting ordinary income, but the extent of the taxpayer's sales and marketing activities is the nail that seals the coffin, requiring dealer treatment. Extent and substantiality of transactions The overall level of the taxpayer's real estate activities, with a particular focus on the extent to which the taxpayer's main occupation is developing property for sales to customers in its ordinary line of business, also factors into the dealer versus investor determination. Questions the courts have examined include whether the taxpayer owns or operates a related construction, development or brokerage business; whether the taxpayer has performed similar activities on other parcels of real property; how many parcels and sales the taxpayer has been involved with in the past; whether the taxpayer has a full-time occupation other than real estate; and whether the taxpayer has a history of syndicating buy-and-hold real estate investment vehicles for investors. Nature and purpose for holding property Finally, courts have extensively analyzed the taxpayer's intent in acquiring and holding the property. The ultimate questions are “why did the taxpayer buy the real property in the first place?” and “for what purpose was the property held at the time of sale?” In Moore v. Commissioner, 30 T.C. 1306 (1958), taxpayers acquired property by gift and liquidated the tract of land by selling 22 lots over an 11-year period. The court in Moore found in favor of the taxpayer and allowed capital gain treatment. The Tax Court noted that one may liquidate an asset in the most advantageous way and still obtain capital gain treatment. The real question is whether, at the time of sale, the property is held merely for liquidation or whether the owner has entered into the business of holding property primarily for sale to customers in the ordinary course of the business. In Moore, the taxpayer's method of disposal was chosen merely to maximize proceeds. The court found that the intent was never anything other than to receive the maximum proceeds on sale–intent consistent with investor treatment. Further supportive facts were that the taxpayer did not engage in extensive development or sales activities during the 11 years of sales. Courts have also found that a taxpayer's intent may change. Then, the relevant question is the purpose for which the property was held at the time of its sale. In Nevin v. Commissioner, T.C. Memo 1965-53 (1965), parcels of real estate that were not yet platted were deemed investment property at the time of sale. However, income from sales of parcels that were platted with streets installed before the sale was deemed ordinary. The court in Nevin noted that “when a rapid turnover occurs under the circumstances … and the taxpayer is in the real estate business and originally acquired the property for resale, it stretches the imagination to conclude that the land was held for investment at the time of sale.” The taxpayer in Nevin treated everything as held for investment, but the court deemed that some plots were held for investment and some were held as dealer property. It is possible for a taxpayer to acquire a large tract of real property, break it into sections, and upon the sale bifurcate the treatment so as to receive capital gain for some plots and ordinary income for others. In Westchester Development, Inc. v. Commissioner, 63 T.C. 198 (1974), the sales of tracts that were subdivided by the taxpayer to sell as sites for construction of single-family homes were sales within the ordinary course of taxpayer's business. However, sales of tracts that had not been subdivided or marketed resulted in capital gain. In such a case, it is generally advisable to separate the plots into separate entities to ensure that one parcel's status does not taint the status of another parcel. It is also important to ensure partnership agreements, investor letters, tax returns and other documents properly reflect language that corresponds to the taxpayer's intent in holding the property. Planning considerations The dealer versus investor analysis became even more complex in 2013 with enactment of the net investment income tax under section 1411. Although it is beyond the scope of this article, practitioners should consider the interplay between a dealer or investor classification and the treatment of the property under section 1411. It is important to be proactive in the consideration of the various factors that the courts have referenced in determining dealer versus investor status. Decisions and actions that occur early in the acquisition phase of real estate investments can have far-reaching implications for the taxability of real estate investments. Taxpayers should consult with their tax advisors to determine the most appropriate classification status–dealer or investor.

I said that inarticulately! There is no UBTI due to the business aspect because it is unlikely that they will be considered in the real estate business (like a real estate agency would be); there is UBTI due to debt financed property if the real estate is encumbered. In either case, there is UBTI. I was just trying to make it clear that it is unlikely that the ownership of the real estate is the problem. If they bought the real estate with cash and had no debt, it is unlikely it would produce UBTI. UBTI produces UBIT (just to confuse everyone). Maybe this helps: However, when debt is incurred by an exempt organization to acquire an income-producing asset, with some exceptions, UBIT is applicable to that portion of the income or gain that is debt-financed. …

IRC 401(a)(7) is a qualification requirement. It says a plan must meet IRC 411 to be a qualified plan. IRC 411(a)(2)(A)(ii) provides that a 5 year cliff vesting is one of the acceptable rules. The reference above to 410(a)(10) should be 401(a)(10). The vesting requirement for a TH plan is under 416(b)(1). IF the plan is TH, the vesting schedule has to be one of the TH schedules (2/20 or 3 years 100%), and the 5 year cliff option is not allowed. If we have a one man plan (who is also a key), it is impossible for the key employee share to be less than 100% (assuming no prior employee participants). Therefore, the plan is Top Heavy, and the TH vesting has to apply. I don't know how they justified not applying TH vesting; can you ask them for a citation? Don't believe they can provide one.

Besides being stupid, which it is, and some of the things listed above, they are converting potential capital gain money (if they are NOT deemed to be in the real estate business) into ordinary income. PLUS, they will need to get an independent valuation of the property each year that would stand up to IRS scrutiny (the real estate broker estimate won't do; they need a proper appraisal - figure upwards of $8 - 10k just for that). It's unlikely that this will produce UBTI as they will not be in the business of real estate with just one home. But they will have the problem of debt financed property unless they pay cash for the house, which does mean a regular income tax return will have to be filed by the plan (expect another couple of thou in costs). If one of our clients insisted on this, we would walk away from the plan; but that's just us.

You have hit on the basic issue with SIMPLEs. There is no practical penalty for missing the 60 day notice period for plan termination. You have to give an annual notice before 60 days about the ability to make an election. Suppose you do that on October 1, 2018 for 2019. Suppose you decide to terminate the plan for 2019 on 12/15/18 and you notify the employees at that point. OK, you are late according to the IRS website, but where is that in the laws. What is the penalty? There is a $50 a day penalty under IRC 6693(c)(1) for every day you are late providing a notice, but it is the notice regarding making contributions that is referenced. And even that can be eliminated with "reasonable cause" (but first you have to get caught - how does the IRS ever know about it?). But there is no reference to this "termination notice" except on the IRS website; it is not in the code, and the penalties don't apply to it. So, in our situation above, there is no penalty on the 2018 year (all is ok) and there are no contributions in 2019 to be penalized ("lose tax benefits"). Is the new 401(k) plan "in trouble". Nope. Does anyone think they can find an actual penalty for providing the termination notice late? I suggest it is really a penalty without a penalty! Which means, maybe you do have until 12/31 to "terminate" the SIMPLE!

Where are you? When we moved to CT in 1975, we had no idea what a "grinder" was. Turned out it was a hero sandwich, which is also a sub sandwich. Luckily, a gyro is a gyro is a gyro (but not a rose!).

And heros, if on Long Island!

An employee who is on furlough (or laid off) is NOT terminated. The problem is that employers will sometimes say than an employee is "laid off" to avoid saying they are terminated. This is a problem and I often have to challenge employers on the issue. Some basic questions: is the job being held open pending the employee's return? Is the employee expected to come back (similar to a maternity leave)? Are you continuing benefits for the employee or have you provided COBRA benefits? etc.. It is a facts and circumstances determination and the words furlough, laid off, leave of absence, are too often used without really explaining what the situation is. Are they still employed? That is the question that has to be answered, and it isn't always straightforward.

Not missing anything; only the unreimbursed medical expenses are allowable under the safe harbor hardship rules. The collection on a loan means there are not expenses for the next 12 months, but for some prior period, which is not part of the options.

In the soda aisle with all the other carbonated and non-carbonated drinks.

And your concern is well placed in that situation, IM(NS)HO.

Just to be clear, it is only the DISTRIBUTIONS that are subject to the excise tax if made prior to two years. There is NO prohibition on withdrawals (the participant can do them whenever he wants), there is just a higher tax rate if you take them out before the penalty period has expired. The employer can terminate the SIMPLE after one year with no problem and start the 401(k).

That argument makes no sense. The plan making the distribution is not doing it right if there is any significant additional work to the mandatory IRA. We do them all the time (we use Millennial Trust) and the system is pretty much automated. If anything, it might be less work than a cash distribution with withholding. Yes, I think there is a potential problem. However, if the employer is paying the cost (which is almost always the case in our client plans, probably 99% of the time), then who cares?

This whole description smacks of the possibility of a significantly bad situation. You don't have much to go on; let's assume worst case that it's a partnership. Can a partner be paid W-2 from his/her partnership rather than via a K-1? No. Can they be paid as an independent contractor? NOPE. This existing 1099 treatment needs to be looked at by competent eyes (atty, acct, consultant) who KNOWS the rules and can figure out what's going on and whether it's within the rules. IF (note, GIANT IF!) the 1099 was appropriate, then she could have a plan using her self-employed income, but as you note, you have to deal with the entire controlled group issue and if there are employees in the business, you probably have to deal with the two entities as one anyway. Sure doesn't sound like the "uninvolved spouse" rule would apply here.

Understood; but that is the difference between a lawyer and a plan consultant. As an expert witness, my testimony is going to be the same no matter which side hires me (and I always explain that to anyone who is thinking of hiring me for that purpose). If I was being hired to deal with an audit of a plan that I did not administer, then I (like you) would make the best argument that would favor the client, but in my admin role, that would not be the case. And I would hope that situational ethics would not apply to an admin firm, but I have been well known for tilting at windmills!

Hopefully if he considers it he will reject it. Seems to me it offers less attraction (the contributions are not tax deductible) and I'm not sure what more flexibility there is when I can do pretty much anything I want with that HCE from the standpoint of giving him full benefits under the plan provisions or limiting those benefits to something smaller. Plus, the doc has the protection of ERISA. What do you see as something that is more attractive?

OK; I would suggest that it does not matter that they were covered for an "overlapping" period of 6 months. Of course, the normal rules for 415 limits, deferral limits, and the like still must be met. If no one get any allocation and no one deferred for the first six months, then there is absolutely nothing to worry about. It sounds like nothing was allocated to the participants who were in the old plan for those first six months. If that is the case, just ignore that period of time in the new plan, which can be made effective back to the beginning of the year as I previously indicated. I guess a question to you (or anyone else) is where do you see an actual problem?

Does it matter "for what purpose"?

You are right, it wouldn't make a difference, but we would do a 1099R for the death payout and it would be reported on the 5500.

But it would also be including by reference the last day requirement, so nothing has accrued that needs to be protected. I don't think that particular point is an issue.

Tom, I assumed we had an end of year requirement (as EVERY ONE of our plans do) or the question would not have been asked. But you are right to point out that a last day provision is necessary to even consider this.

Nope.

Absolutely not; I am nothing if not consistent. My determination has nothing to do with whether it helps or hurts the "situation".