Archive for September, 2014


September 30th, 2014 No comments

In our March 7, 2012 blog post, we discussed a tax preparation and tax planning strategy whereby individuals who desire to make a Roth IRA contribution but cannot do so because of the amount of income they earned or because they are covered by their employer’s retirement plan can contribute to the individual’s traditional IRA and then convert the traditional IRA to a Roth IRA. We suggest you read the March 7 blog posting for the full details.

At a national tax conference, a practitioner mentioned that the IRS is challenging this tax strategy for one of his clients under IRS audit. The IRS argument for disallowing the conversion is that the conversion is in violation of the “step-transaction” doctrine.

The step-transaction doctrine is when the courts look past the transactions’ technical form and taxes the transactions based on their underlying substance. In other words, the courts render the individual tax significance of each step irrelevant when, considered as a whole, they all amount to no more than a single transaction. In its more simplistic form, if a taxpayer is precluded from going from point A to point B in a tax-free transaction, when the taxpayer goes from point A to point C and then to point D and eventually goes to point B and the combination of those steps results in a tax-free transaction, the IRS and the courts will not recognize these progressive steps as a tax-free transaction. The reasoning of the courts is that the substance of the transaction and not the form prevails, and since the taxpayer has merely gone from point A to point B, it remains a taxable transaction.

It will be interesting to see if this audit adjustment is pursued by the IRS and if the issue is litigated. While the IRS argument may have merit, the IRS is ignoring the fact that taxpayers are allowed by law to convert traditional IRAs to Roth IRAs. Whereas most traditional IRA conversions to Roth IRAs result in the immediate recognition of tax to the taxpayer, the strategy discussed in the March 7 post usually results in no or little tax being paid.

If you want to learn more about your personal tax strategies, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

Copyright © 2014 Keystone Financial Solutions, P.C. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.


September 23rd, 2014 No comments

Recent posts have discussed the PA Dept. of Revenue’s (DOR) efforts to deny Sch. UE-1 expenses that employees are claiming against their W-2 wages. The PA DOR is requesting letters from the employee’s employer stating that the expenses claimed as non-reimbursable by the employee are in fact non-reimbursable per the employer’s expense reimbursement policy.

The DOR’s policy is no different than that of the IRS. The Richards case (T.C. Memo 2014-88, May 15, 2014) illustrated the rule that in order for an employee to deduct unreimbursed employee business expenses on Schedule A (subject to the 2% of AGI limitation), the expense must Read more…



September 16th, 2014 No comments

On August 12, 2014, our blog discussed the Tax Court case of A. L. Bobrow regarding the rollover of Individual Rollover Accounts (IRAs). Bobrow was a tax attorney who relied upon IRS Publication 590 when filing his personal income tax return. The IRS argued that the taxpayer incorrectly filed his tax returns even though he followed the IRS’s interpretation of the tax law. Huh? Sounds unfair? Are we saying that Read more…



September 9th, 2014 No comments

You receive that glossy brochure from your trade association that sounds so appealing. The seminar is being held in a very nice resort area or on a cruise ship. The association’s brochure says that the seminar may be tax deductible and in the fine print it states that you need to consult with your tax advisor for guidance. While you realize that your tax professional provides both tax preparation and tax planning services and is a phone call away, you are lured by the words “may be tax deductible”. You act on impulse, tell your spouse to pack his/her bags, and are confident that the IRS will be paying part of the cost of the trip. Wow, a vacation paid in part by the IRS. Can life be any better?

When pondering such a trip, you need to understand the IRS’s rules to determine if any portion of the trip is tax deductible. Some important considerations include: Read more…



September 2nd, 2014 No comments

Scholarship money is tax-free income to the recipient if used to pay tuition and fees, or when used to pay for books, supplies, and equipment required by the curriculum. Anything received tax-free is a good thing . . . OR IS IT? What most people don’t know is that students are sometimes better off claiming their scholarship as taxable income, if permitted to do so. Why would one be better off reporting a scholarship as taxable income when it can be reported as tax-free income? Read more…

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